Answer:
The effective annual rate is gotten to be 7.36%
Explanation:
Given the par value = $2,000
Annual Coupon Rate = 6.51%
Semiannual Coupon Rate = 6.51% / 2 = 3.255%
Semiannual Coupon = 3.255% * $2,000 = $65.10
Current Price = 94.023% * $2,000 = $1,880.46
Time to Maturity = 13 years
Semiannual Period = 26
Let semiannual yield to maturity be s%
$1,880.46 = $65.10 x PVIFA(s%, 26) + $2,000 x PVIF(s%, 26)
Making use of Ms excel and calculating we have;
N = 26
PV = -1880.46
PMT = 65.10
FV = 2000
s = 3.613%
Semiannual yield to maturity = 3.613%
The effective annual rate can be obtained thus;
Effective annual rate = (1 + Semiannual YTM[tex])^{2}[/tex] - 1
= (1 + 0.03613[tex])^{2}[/tex] - 1
= 1.0736 - 1
= 0.0736 or 7.36%
Therefore the effective annual rate is gotten to be 7.36%
