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Treasury bonds paying an 8% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? (Hint: What is the effective annual yield on the bond?)

Respuesta :

jepessoa

Answer:

8.16%

Explanation:

current yield = bond's value x (1 + semiannual interest rate)ⁿ

in this case:

  • bond's value = $1,000 (we choose the value)
  • semiannual interest rate = 8% / 2 = 4%
  • n = 2 semiannual coupons

current yield = $1,000 x (1 + 4%)² = $1,000 x 1.0816 = $1,081.60

in order for a bond that pays an annual coupon to be sold at the same value, it must yield the same return = ($1,081.60 - $1,000) / $1,000 = 8.16%

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