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Sunset Sales has 7.2 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield?

Answer :

Answer:

7.52%

Explanation:

For computing the effective annual yield, first we have to compute he rate of interest by applying the RATE formula that is shown in the attachment

Provided that

Present value = $1,000 × 98.6% = $986

Assuming figure - Future value or Face value = $1,000  

PMT = 1,000 × 7.2% ÷ 2 = $36

NPER = 11 years × 2 = 22 years

The formula is shown below:  

= Rate(NPER;PMT;-PV;FV;type)  

The present value come in negative

The rate comes is 3.69%

Now the effective annual yield is

= (1 + rate)^number of period - 1

= (1 + 3.69%)^2 -1

= 7.52%

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