A hydro bond with a face value of $5,000 and twenty years remaining until the maturity pays a coupon rate of 3

Finance Apr 25, 2021

A hydro bond with a face value of $5,000 and twenty years remaining until the maturity pays a coupon rate of 3.2% compounded semiannually. Calculate its effective yield to maturity if it is priced at $4,800?

Expert Solution

Computation of Yield to Maturity using Rate Function in Excel:

=rate(nper,pmt,-pv,fv)*2

Here,

Rate = Yield to Maturity = ?

Nper = 20 Years*2 = 40 Periods

PMT = $5,000*3.2%/2 = $80

PV = $4,800

FV = $5,000

Substituting the values in formula:

=rate(40,80,-4800,5000)*2

Rate or Yield to Maturity = 3.48%

Computation of Effective Yield to Maturity:

Effective Yield to Maturity = (1+i/n)^n

Here,

i = Yield to Maturity = 3.48%

n = Number of Compounding Periods = 2

Effective Yield to Maturity = (1+3.48%/2)^2 - 1 = 3.51%

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