Martin Software has 9.6 percent coupon bonds on the market with 20 years to matu

Question

Martin Software has 9.6 percent coupon bonds on the market with 20 years to maturity. The bonds make semiannual payments and currently sell for 107.6 percent of par.

What is the current yield on the bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the YTM? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the effective annual yield? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Martin Software has 9.6 percent coupon bonds on the market with 20 years to maturity. The bonds make semiannual payments and currently sell for 107.6 percent of par.

What is the current yield on the bonds? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the YTM? (Round your answer to 2 decimal places. (e.g., 32.16))

What is the effective annual yield? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Current yield Annual $ interest on a Face value $ 1000 coupon bond = 9.6% ie. $ 96 Current market price of the bond = 107.6% = (107.6 /100) *1000 = $ 1076 Current yield on the bonds = Annual intetest payments /Current market price of the bonds ie. 96 /1076 = 8.92% YTM is the rate that makes the price of the bond just equal to the present value   of its future cash flows. It is the unknown i in the formula PV of a bond = PV of its interest payments + PV of Principal ie. 1076 = 48 {(1- (1+i)^-40 }   + 1000/(1+i)^40 Solving for I, in an online calculator,we get , i=4.3933% semi annual    ie   8.79% annual Effective annual yield - based on the above YTM is (1+ i/n)^n   - 1 where n is the no of compounding periods per year ie. {1 +( 0.0879/ 2)}^2     -1 = 8.98% Periodic interest rate = 9.6% So, effective annual interest rate = {1 +( 0.096/ 2)}^2    -1 = 9.83%

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