Question

Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annu- ally? (Hint: What is the effective annual yield on the bond?)

Answer 1

Answer: 8.16%

Explanation:

The Effective Annual Yield is the interest rate that converts an interest rate that compounds more than once a year to an annual rate.

Expressed by;

= (1 + interest/number of times compounded per year)^n - 1

= ( 1 + 0.08/2)^2 - 1

= 1.0816 - 1

= 8.16%