A 10-year maturity bond with par value $1,000 makes semiannual coupon payments a
ID: 2796159 • Letter: A
Question
A 10-year maturity bond with par value $1,000 makes semiannual coupon payments at a coupon rate of 9%.
a. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is $950. (Round your intermediate calculations to 4 decimal places. Round your answers to 2 decimal places.)
b. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is $1,000. (Do not round intermediate calculations.Round your answers to 2 decimal places.)
c. Find the bond equivalent and effective annual yield to maturity of the bond if the bond price is $1,040. (Round your intermediate calculations to 4 decimal places. Round your answers to 2 decimal places.)
Explanation / Answer
a) YTM can be calculated using I/Y function on a calculator
N = 10 x 2 = 20, PMT = 9% x 1000 / 2 = 45, PV = -950, FV = 1000 => Compute I/Y = 4.90%
Annualized YTM = 4.90% x 2 = 9.80%
Bond Equivalent Yield (BEY) = 2 x (1 + Annualized YTM)^(1/2) - 1] = 2 x (1 + 9.80%)^(1/2) - 1] = 9.57%
b) With PV = -1000 => Compute I/Y = 4.5%
Annualized YTM = 4.5% x 2 = 9.00%
BEY = 2 x ((1 + 9%)^(1/2) - 1) = 8.81%
c) With PV = -1040 => Compute I/Y = 4.20%
Annualized YTM = 4.2% x 2 = 8.40%
BEY = 2 x ((1 + 8.4%)^(1/2) - 1) = 8.23%
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