O 367 percent 25 pts Question 38 The semiannual8year bonds o

O 3.67 percent 2.5 pts Question 38 The semiannual,8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6825 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? o $85.02 O $42.25 o $43.15 O $42.50 O $86.29 Question 39 2.5 pts

Solution

They are selling at par, so the YTM = coupon rate.

we are given the effective annual ytm, we need to find the nominal rate.

EAR = (1 + r / m)^m - 1

where, EAR = Effective annual rate = 8.6825% or 0.086825, r = nominal rate, m = no. of times compounded in a year = 2 (Semi - annual)

or, 0.086825 = (1 + r / 2)² - 1

or, 1.086825 = (1 + r /2)²

or, 1 + r /2 = 1.04250899276

or, r / 2 = 0.04250899276

or, r = 0.08501798552 or 8.501798552%

This is the coupon rate. Interest is paid semi - annually.

Interest payment = $1000 x 8.501798552% / 2 = $42.50