Colton Corporation's semiannual bonds have a 12-year maturity, an 6.10% nominal coupon paid semiannually, and sell at their $1,000 par value. The firm's annual bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. To provide the same effective annual yield (EFF%), at what price should the annual payment bonds sell?
Colton Corporation's semiannual bonds have a 12-year maturity, an 6.10% nominal coupon paid semiannually, and sell at their $1,000 par value. The firm's annual bonds have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. To provide the same effective annual yield (EFF%), at what price should the annual payment bonds sell?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Colton Corporation's semiannual bonds have a 12-year maturity, an 6.10% nominal coupon paid
semiannually, and sell at their $1,000 par value. The firm's annual bonds have the same risk, maturity,
nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. To
provide the same effective annual yield (EFF%), at what price should the annual payment bonds sell?
Hint: Calculate the EFF% for the semiannual bond's coupon rate, and then use it as the YTM for the annual
payment bond. Recall that EFF% = [1 + (Nominal Rate / n)]" - 1
Your answer should be between 980.00 and 1000.00, rounded to 2 decimal places, with no special
characters. Note that the annual payment bond must sell for less than par since it receives the same cash
flow, but not as quickly.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F50061f72-d587-4549-9904-89206beea343%2F5b553188-be0f-49dd-91c3-d2af1d90a075%2F4pkq8od_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Colton Corporation's semiannual bonds have a 12-year maturity, an 6.10% nominal coupon paid
semiannually, and sell at their $1,000 par value. The firm's annual bonds have the same risk, maturity,
nominal interest rate, and par value, but these bonds pay interest annually. Neither bond is callable. To
provide the same effective annual yield (EFF%), at what price should the annual payment bonds sell?
Hint: Calculate the EFF% for the semiannual bond's coupon rate, and then use it as the YTM for the annual
payment bond. Recall that EFF% = [1 + (Nominal Rate / n)]" - 1
Your answer should be between 980.00 and 1000.00, rounded to 2 decimal places, with no special
characters. Note that the annual payment bond must sell for less than par since it receives the same cash
flow, but not as quickly.
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