Question

Stanley hart invested in a municipal bond that promised an annual yield of 6.7 percent. the bond pays coupons twice a year. what is the effective annual yield (eay) on this investment? (round percentage to two decimal places.)

Answer 1

The effective interest rate is given by

$r= \left(1+\frac{i}{t}\right)^t-1$

Given that the bond yeilds an annual yield of 6.7 percent and pays coupons twice a year.

The effective interest rate is given by:

$r= \left(1+\frac{0.067}{2}\right)^2-1 \\ \\ =(1+0.0335)^2-1 \\ \\ =(1.0335)^2-1=1.0681-1 \\ \\ =0.0681=6.81\%$