Mayflower, Inc. has some 7% semi-annual coupon bonds on the market selling at $1,012. The bonds have 9 years left to maturity. What is the effective annual yield on these bonds?

Question

Quizplus · Accepted Answer

The effective annual yield (EAY) can be calculated using the bond's price, the coupon rate, and the time to maturity. Given that the bond is selling for $1,012, has a 7% semi-annual coupon, and 9 years to maturity, we can calculate the yield to maturity (YTM) on a semi-annual basis and then convert it to an effective annual yield. The YTM found through calculation or financial calculator considering the semi-annual periods would be close to 6.94% when annualized correctly, taking into account the compounding effect.