The newly issued bonds of the Wynslow Corp. offer a 6% coupon with semi-annual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Question

Quizplus · Accepted Answer

The nominal annual rate is 6%, but because interest is compounded semi-annually, the effective annual rate (EAR) is greater than 6%. The EAR can be calculated using the formula: EAR = (1 + (nominal rate/number of periods))^number of periods - 1. For these bonds, EAR = (1 + 0.06/2)^2 - 1 = 6.09%, which is greater than 6% but less than 7%.

The Newly Issued Bonds of the Wynslow Corp