Question

Trevor Price bought 10-year bonds issued by Harvest Foods fi ve years ago for $936.05. Th e bonds make semiannual coupon payments at a rate of 8.4 percent. If the current price of the bonds is $1,048.77, what is the yield that Trevor would earn by selling the bonds today?

Answer 1

Answer: 11.14%

Explanation:

Buying price of bond = $936.05 -PV

Years investment held = n= 5*2

Rate of the Coupon = C = 8.4%

Frequency of payment = m= 2

Annual coupon = $1,000 × (0.084/2) = $42

Realized yield = i

Selling price of bond = PB = $1,048.77 = FV

Enter N= 10, PMT = $42, PV= -$936.05$, FV = 1,048.77

Answer 5.425%

The effective annual yield can be computed as:

EAY = (1+ Quoted m)^m -1

= (1+0.054)^2 - 1

=(1.054)^2- 1

=0.1114= 11.14