Answer:
0.0782
Explanation:
First and foremost we need to determine the price of investment A in order to ascertain the price of Bond B as well:
The price of investment A is the present value of its cash flows.
price of investment A=$342.76+$342.76/(1+14.48%)^1+$342.76/(1+14.48%)^2+$342.76/(1+14.48%)^3+$342.76/(1+14.48%)^4+$342.76/(1+14.48%)^5+$342.76/(1+14.48%)^6+$342.76/(1+14.48%)^7=$ 1,791.31
Price of Bond=total value of holdings-price of investment A=$2,607-$1,791.31=$ 815.69
The yield to maturity on Bond can be determined using rate formula in excel:
=rate(nper,pmt,-pv,fv)
nper is the number of coupon payments which 20*2=40
pmt is the semiannual coupon=$1000*5.98%*6/12
=$29.9
pv is the current price of $815.69
fv is the face value of $1000
=rate(40,29.9,-815.69,1000)=3.91%
Annual yield=3.91%
*2=7.82%
