The newly issued bonds of the Wynslow Corp.offer a 8% coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:

Question

Quizplus · Accepted Answer

Since the bonds are priced at par value, the yield to maturity (YTM) is equal to the coupon rate of 8%. However, since interest payments are made semiannually, the effective annual rate (EAR) must be calculated, which is slightly higher than the YTM. Using the formula,
EAR=(1+ (Coupon rate/n))^n - 1, where n is the number of compounding periods per year, we get:
EAR = (1+ (0.08/2))^2 -1 = 0.0816 or 8.16%
Therefore, the effective annual rate provided by these bonds is greater than 8% but less than 9%. Hence, the correct answer is D, greater than 8% but less than 9%.

The Newly Issued Bonds of the Wynslow Corp