Question

Treasury bonds paying an 7.4% coupon rate with semiannual payments currently sell at par value.
What coupon rate would they have to pay in order to sell at par if they paid their coupons annually?
(Hint: What is the effective annual yield on the bond?)
(Round your answer to 2 decimal places.)

Answer 1

Answer:

The formula for effective annual yield is as under:

Effective Annual Yield = (1+r/n)^n -1

Here we have r which is 7.4%, n is 2 for semi-annually. By putting values in the above equation we have:

Effective Annual Yield = (1+7.4%/2)^2 -1 = 0.075369 which is almost 7.54%

The effective annual yield on the bond is 7.54% and for the bond which would be paid annually would have coupon rate of 7.54% if the company desires to issue the bond at par.