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Homework answers / question archive / Kevin Phan bought 10-year bonds issued by Harvey Norman 5 years ago for $936
Kevin Phan bought 10-year bonds issued by Harvey Norman 5 years ago for $936.05. The bonds make semi-annual coupon payments at a rate of 8.4 per cent. If the current price of the bond is $1,048.77, what is the effective annual yield that Kevin would earn by selling the bonds today?
We can calculate the yield by using the following formula in excel:-
=rate(nper,pmt,-pv,fv)
Here,
Rate = Yield (Semiannual)
Nper = 5*2 = 10 periods (semiannual)
Pmt = Coupon payment = $1,000*8.4%/2 = $42
PV = $936.05
FV = $1,048.77
Substituting the values in formula:
= rate(10,42,-936.05,1048.77)
= 5.43%
Effective annual yield = (1+yield)^n-1
= (1+5.43%)^2-1
= 0.1115 - 1
= 11.15%
