Computation of effective annual yield bond value

Reference no: EM1310156

Computation of effective annual yield bond value.

You have just purchased a newly issued Company bond at par. This 5-year bond pays $60 in interest semi-annually. You are also considering the purchase of another Company that pays $30 in semi-annual interest payments and has six years remaining before maturity. This bond has a face value of $1,000.

a) What is the yield of the 5-year bond expressed as an effective annual yield?

b) Assume that the 5-year bond and the 6-year bond have the same yield. What should you be willing to pay for the 6-year bond?

c) How would your answer to part b) change if the 5-year bond pays $40 in semi-annual interest instead of $60? Assume that the 5-year bond paying $40 semi-annually is purchased at par.

Reference no: EM1310156

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