A 20-year maturity bond with par value of $1,000 makes semiannual coupon payments at a coupon rate of 8%. Find the bond equivalent and effective annual yield to maturity of the bond for the following bond prices. (Round your answers to 2 decimal places.)

Bond Equivalent Yield = 8.52%

Effective annual Yield Rate = 8.71%

Explanation:

Since the bond price is not given, I will assume a bond price of $950, substitute it with whatever you're given

For starters, we start by finding the yield to maturity or YTM. To find the yield to maturity, we will have to put the following values in the financial calculator:

N = 20 * 2 = 40

PV = -950;

PMT = [8%/2]*1000 = 40;

FV = 1000;

Press CPT, then I/Y, which gives us 4.26

This means that the Periodic Rate = 4.26%

Next, we compite the Bond equivalent yield, which is

Bond equivalent yield = Periodic Rate * No. of compounding periods in a year

BEY = 4.26% * 2 = 8.52%

And finally, the effective annual yield rate is

effective annual yield rate = [1 + Periodic Rate]^(No. of compounding periods in a year) - 1

= [1 + 0.0426]² - 1

= 1.0871 - 1

= 0.0871, or 8.71%

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