Bourdon Software has 8.8 percent coupon bonds on the market with 19 years to mat

Question

Bourdon Software has 8.8 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 107.2 percent of par. What is the current yield on the bonds? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the YTM? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) What is the effective annual yield? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Part A)

The current yield on bonds can be calculated with the use of following formula:

Current Yield = Annual Coupon Payment/Current Selling Price*100

________

Here, Annual Coupon Payment = 1,000*8.8% = $88 and Current Selling Price = 1,000*107.2% = $1,072

Using these values in the above formula for current yield, we get,

Current Yield = 88/1,072*100 = 8.21%

________

Part B)

The YTM can be calculated with the use of Rate function/formula of EXCEL/Financial Calculator. The function/formula for Rate is Rate(Nper,PMT,-PV,FV) where Nper = Period, PMT = Coupon Payment, PV = Current Bond Price and FV = Face Value of Bonds.

________

Here, Nper = 19*2 = 38, PMT = 1,000*8.8%*1/2 = $44, PV = $1,072 and FV = $1,000 [we use 2 since the bond is semi-annual]

Using these values in the above function/formula for Rate, we get,

YTM = Rate(38,44,-1072,1000)*2 = 8.05%

________

Part C)

The effective annual yield can be calculated with the use of following formula:

Effective Annual Yield = (1+YTM/2)^(2) - 1 = (1+8.05%/2)^2 - 1 = 8.21%

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