A $1000 bond,with semi-annual coupons of $35,matures at par on June 1,2015.It was purchased on June 1,2005 at 105 and sold on June 1,2010 at 97.What yield rate,j₂,is earned using the method of averages?

Question

Quizplus · Accepted Answer

The yield rate is calculated as the average of the holding period yield rates. The holding period yield rate for the first period is:j1 = (35 + (1000 - 1050) / 10) / 1050 = 0.0535The holding period yield rate for the second period is:j2 = (35 + (1000 - 970) / 5) / 970 = 0.0549The average yield rate is:j = (j1 + j2) / 2 = 0.0542Therefore, the yield rate earned using the method of averages is 5.42%.

A $1000 Bond,with Semi-Annual Coupons of $35,matures at Par on June