Martin Software has 9.2 percent coupon bonds on the market with 18 years to matu

Question

Martin Software has 9.2 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.8 percent of par What is the current yield on the bonds? (Round your answer to 2 decimal places. (e.g., 32.16), Current yield 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) Effective annual yield 1%

Explanation / Answer

The bond price equation for this bond is:

P0= $1,068 = $46* (PVIFA R%,36) + $1,000(PVIF R%,36)

Using a spreadsheet, financial calculator, or trial and error we find:

R= 4.25%

This is the semiannual interest rate, so the YTM is:

YTM = 2 × 4.25% = 8.5%

The current yield is:

Current yield = Annual coupon payment / Price

= $92 / $1,068

= 0.0861 or 8.61%

The effective annual yield is the same as the EAR, so using the EAR equation:

Effective annual yield = (1 + 0.0425)2– 1 = 0.0868 or 8.68 %

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