$\begin{array}{lc}
\text {Par Value } &\$1,000\
\text { Time to Maturity} & \text {18 Years}\
\text { Coupon } &\text { 9 \% (paid annually) } \
\text { Current price } &\$917.99\
\text { Yield to Maturity } &12\%\
&\
\end{array}$
Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be
A) less than 10%.
B) more than 10%.
C) 10%.
D) Cannot be determined.
E) None of the options are correct.

Question

$\begin{array}{lc}
  \text {Par Value  } &\$1,000\
 \text {  Time to Maturity} & \text {18 Years}\
 \text { Coupon } &\text { 9 \% (paid annually) } \
 \text { Current price } &\$917.99\
 \text { Yield to Maturity } &12\%\
 &\
\end{array}$
 Given the bond described above, if interest were paid semi-annually (rather than annually) and the bond continued to be priced at $917.99, the resulting effective annual yield to maturity would be
A) less than 10%.
B) more than 10%.
C) 10%.
D) Cannot be determined.
E) None of the options are correct.

Quizplus · Accepted Answer

When interest is paid semi-annually instead of annually, the compounding effect increases the effective annual yield. Given that the bond's stated yield to maturity is 12% under annual payments, switching to semi-annual payments would increase the effective annual yield, making it more than 10%.

Given the Bond Described Above, If Interest Were Paid Semi-Annually