A $1000 bond pays semi-annual coupons of $60 every April 16 and October 16.The bond is bought for $1080 on October 17,2007 and is sold for $1050 on April 16,2012.Using the method of averages,what is the yield rate,j₂,earned over the period?

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Quizplus · Accepted Answer

The yield rate is calculated using the average annual return formula. The bond pays $60 semi-annually, so $120 annually. The bond was held for 4.5 years, earning $540 in coupons. The capital loss is $30 ($1080 - $1050). The total return is $510 ($540 - $30). The average annual return is $510 / 4.5 years = $113.33. The average yield rate is $113.33 / $1050 (average price) = 10.64%.

A $1000 Bond Pays Semi-Annual Coupons of $60 Every April