A $1200 bond with semi-annual coupons at j₂ = 6% is sold at q = 97 on August 2,2010.It is bought at q = 85 on February 2,2003,with the first coupon due August 2,2003.Using the method of averages,what is the yield rate,j₂?

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Quizplus · Accepted Answer

The yield rate, j2, is 8.35%. This can be calculated using the method of averages, which takes into account the average price of the bond over the period of time that it is held. In this case, the bond is held for 2 years and 6 months, and the average price is (97 + 85) / 2 = 91. The yield rate can then be calculated as follows:j2 = (C / P) + ((P - R) / nP)where:C = the annual coupon paymentP = the purchase priceR = the redemption valuen = the number of years to maturityIn this case, the annual coupon payment is $60, the purchase price is $910, the redemption value is $1200, and the number of years to maturity is 2.5. Plugging these values into the equation, we get:j2 = (60 / 910) + ((910 - 1200) / (2.5 * 910))j2 = 0.0659 + (-0.0247)j2 = 0.0835Therefore, the yield rate is 8.35%.

A $1200 Bond with Semi-Annual Coupons at J2 = 6

A $1200 Bond with Semi-Annual Coupons at J₂ = 6