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Blossom Corp
Blossom Corp. has five-year semi-annual bonds outstanding that pay a coupon rate of 8.8 percent, these bonds are priced at $1,070.86. (Round answers to 2 decimal places, e.g. 15.25%.) What is the yield to maturity on these bonds? Yield to maturity % Assume semiannual coupon payments. What is the effective annual yield? Effective annual yield %
Expert Solution
a. The yield to maturity is computed as shown below:
Enter the below variables in the financial calculator as follows:
FV = 1,000
PV = - 1,070.86
PMT = 44 ((8.8% / 2 x (1,000))
N = 10 (5 x 2)
Now press CPT and then I/Y. It will give I/Y equal to 3.545993314%
Now because the bond makes semi annual payments, hence the above rate shall be multiplied by 2 as follows:
= 3.545993314% x 2
= 7.091986627% or 7.09% Approximately
We can also use the below excel as follows:
= RATE(N,PMT,PV,FV)
= RATE(10,44,-1070.86,1000)
It will also give I/Y equal to 3.545993314%
Now since the bond makes semi annual payments, hence the above rate shall be multiplied by 2 as follows:
= 3.545993314% x 2
= 7.091986627% or 7.09% Approximately
Effective annual yield is computed as follows:
= (1 + r / m)m - 1
= (1 + 0.07091986627 / 2)2 - 1
= 7.22% Approximately
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