Asked by Jordyn Flora on May 02, 2024
Verified
Mayflower, Inc. has some 7% semi-annual coupon bonds on the market selling at $1,012. The bonds have 9 years left to maturity. What is the effective annual yield on these bonds?
A) 6.82%
B) 6.91%
C) 6.94%
D) 7.04%
E) 7.12%
Semi-Annual Coupon
A bond payment made to bondholders twice a year, representing interest on the bond's face value.
Effective Annual Yield
The actual interest rate an investment earns in a year, taking into account the effects of compounding.
Maturity
The final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.
- Identify the factors influencing bond yields and prices in the secondary market.
Verified Answer
JA
Jamie AllisonMay 08, 2024
Final Answer :
C
Explanation :
The effective annual yield (EAY) can be calculated using the bond's price, the coupon rate, and the time to maturity. Given that the bond is selling for $1,012, has a 7% semi-annual coupon, and 9 years to maturity, we can calculate the yield to maturity (YTM) on a semi-annual basis and then convert it to an effective annual yield. The YTM found through calculation or financial calculator considering the semi-annual periods would be close to 6.94% when annualized correctly, taking into account the compounding effect.
Learning Objectives
- Identify the factors influencing bond yields and prices in the secondary market.