The market price of a semi-annual pay bond is $975.71. It has 18.00 years to maturity and a coupon rate of 6.00%. Par value is $1,000. What is the effective annual yield?

the effective annual yield is 12.34 %.

Explanation:

The effective annual yield is the interest rate that will make the coupons and par value equal the market price of the Bonds. It is also known as the Yield to Maturity (YTM).

This is calculated using the Time Value of Money Technique as follows :

PV = - $975.71

PMT = ($1,000 × 6.00%) ÷ 2 = $60

N = 18.00 × 2 = 36.00

P/YR = 2

FV = $1,000

YTM = ?

Using a Financial calculator to input the data as above, the effective annual yield is 12.34 %.

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