Kevin Phan bought 10-year bonds issued by Harvey Norman 5 years ago for $936

Finance Sep 11, 2020

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?

Expert Solution

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%

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