$\begin{array}{ll}
\text { Par value } &\$1,000\
\text { Time to Maturity } &20 \text { Years } \
\text { Coupon} &10 \% \text { (paid annually)}\
\text { Current price } &\$850\
\text {Yield to Maturity } &12\%\
\end{array}$
Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be
A) less than 12%.
B) more than 12%.
C) 12%.
D) Cannot be determined.
E) None of the options are correct.

Question

$\begin{array}{ll}
  \text { Par value } &\$1,000\
 \text { Time to Maturity } &20 \text { Years } \
 \text {  Coupon} &10 \%  \text { (paid annually)}\
 \text { Current price } &\$850\
 \text {Yield to Maturity  } &12\%\
\end{array}$
 Given the bond described above, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be
A) less than 12%.
B) more than 12%.
C) 12%.
D) Cannot be determined.
E) None of the options are correct.

Quizplus · Accepted Answer

When interest is compounded more frequently (in this case, semi-annually instead of annually), the effective annual yield increases because interest is being earned on interest more frequently within the year.

Given the Bond Described Above, If Interest Were Paid Semi-Annually