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Bond Yields and Valuation: Compute effective annual yield; coupon rate for new bonds

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1. Bond yields: Stealers Wheel Software has 8.4 percent coupon bonds on the market with nine years to maturity. The bonds make semiannual payment and currently sell for 104 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?

2. Bond Yields: Petty Co wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $1095.00 make semiannual payments, and mature in 20 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?

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Solution Summary

The solution is comprised of an explanation for each equational process and also has an attached Excel file which includes the calculations for clarity. The explanation is 160 words in length.

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1. Current yield = Annual Interest / Price
Annual interest = $84 and the current price is 1,000X104% = 1,040
Current yield = 84/1,040 = 8.08%
The YTM is the discounting rate that will make the present value of interest and ...

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