The market price of a semi-annual pay bond is $990.01. It has 12.00 years to maturity and a coupon rate of 7.00%. Par value is $1,000. What is the effective annual yield?

The answer is 7.12percent

Explanation:

Annual yield is also the same as Yield-to-Maturity which is the rate of return as investor of a bond is expecting to earn.

N (Number of years) = 24 years (12x 2)

I/Y (Yield to Maturity) = ?

PV (Present Value) = $990.01

PMT (Payment) = 3.5 % of $1,000 (4.6%/2) = $35

FV (Future value) = $1,000

Using Financial calculator:

The yield to maturity is

3.56 (semi annual)

Annual yield to maturity is 3.56 x 2

7.12percent

7.12%

Explanation:

The actual return that an investor earn on a bond until its maturity is called the Yield to maturity. It is a long term return which is expressed in annual rate.

According to given data

Face value of the Bond is $1,000

Coupon Payment = C = $1,000 x 7% = $70 annually = $35 semiannually

Price of the Bond = P = $990.01

Numbers of period = n = 12 years x 2 = 24 periods

Use Following Formula to calculate YTM

Yield to maturity = [ C + (F - P) / n ] / [ (F + P) / 2 ]

Yield to maturity = [ $35 + ($1,000 - $990.01) / 24 ] / [ ($1,000 + $990.01) / 2 ]

Yield to maturity = $35.416 / $995.005 = 0.0356

Yield to maturity = 3.56% semiannually OR 7.12% annually