Question

A company offers bonds at a discount price of $800 for a 4% $1,000 bond that matures in 20 years with a dividend payable semi annually. What is the closest effective interest rate per year, compounded semiannually

Answer 1

Answer:

5.69 %

Explanation:

The Interest rate on this Bond is its Yield to Maturity (YTM) and is calculated as  :

PV = - $800

PMT = ($1,000 × 4%) ÷  2 = $20

N = 20 × 2 = 40

P / Yr = 2

FV = $1,000

YTM = ?

Using a financial calculator to input the data as above, the Yield to Maturity on this Bond is 5.6870% or 5.69 %