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Homework answers / question archive / A hydro bond with a face value of $5,000 and twenty years remaining until the maturity pays a coupon rate of 3
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?
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%