Question
Suppose that you have a bond with a $1,000 par value that matures in 2 years and is currently selling at par, meaning that the
Suppose that you have a bond with a $1,000 par value that matures in 2 years and is currently selling at par, meaning that the coupon rate and the YTM are the same. Suppose that the annual coupon rate (and annual YTM) is 6 percent. Suppose that you purchase the bond today and you reinvest the coupon payments at a semi-annual rate of 4 percent until it matures.
Year 1: CF=30, FV 4%=1.1249, FV=33.75 Year 2: CF=30, FV 4%=1.0816, FV32.45
Year 3: CF=30, FV 4%=1.0400, FV=31.20. Year 4: CF=30, FV 4%=1.000, FV=30.00
What is the effective semi-annual yield-to-maturity (YTM)?
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