Problem 6-18 Bond Yields [LO 2] PK Software has 7.7 percent coupon bonds on the
ID: 2642609 • Letter: P
Question
Problem 6-18 Bond Yields [LO 2]
PK Software has 7.7 percent coupon bonds on the market with 24 years to maturity. The bonds make semiannual payments and currently sell for 108.5 percent of par.
What is the current yield on PK's bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What is the YTM? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
What is the effective annual yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
PK Software has 7.7 percent coupon bonds on the market with 24 years to maturity. The bonds make semiannual payments and currently sell for 108.5 percent of par.
PK Software has 7.7 percent coupon bonds on the market with 24 years to maturity. The bonds make semiannual payments and currently sell for 108.5 percent of par. Requirement 1: What is the current yield on PK's bonds? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Current yield ________________ % Requirement 2: What is the YTM? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Yield to maturity _______________ % Requirement 3: What is the effective annual yield? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)Explanation / Answer
Requirement 1:
Current Yield is calculated by dividing the annual coupon payment by the current market price.
The formula is:
Current Yield = Annual Coupon Payment/Current Price*100
_____________
Solution:
Annual Coupon Payment = Face Value*Coupon Rate = 1,000*7.7% = $77
Current Price = Face Value*Current Selling Percentage = 1,000*108.50% = $1,085
Current Yield = $77/$1,085*100 = 7.10%
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Requirement 2:
YTM can be easily calculated with the use of EXCEL/Financial Calculator.
The function/formula that would be used is: = Rate(Nper, PMT,-PV,FV), where, Nper is Period, PMT is the amount of coupon payment, PV is the current selling and FV is the Face value of Bonds
_____________
Solution:
Here, Nper = 24*2 = 48 (since coupon is semi-annual, PMT = 1,000*7.7%*1/2 = $38.50, PV = $1,085 and FV = $1,000
YTM = Rate(48,38.50,-1085,1000)*2 = 6.97% (we multiply by 2, since the bond is a semi-annual bond and we need to calculate YTM on an annual basis)
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Requirement 3:
Effective Annual Yield to Maturity is calculated with the use of Nominal Yield to Maturity.
The formula is :
Effective Annual Yield = (1+Nominal Yield to Maturity)^n -1 where n is the componding period.
_____________
Solution:
Effective Annual Yield = (1+6.97%/2)^2 - 1 = 7.09% (answer may vary because of rounding off)
Here compounding period is taken as 2, since it is a semi-annual bond.