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Question : Question
The Polaroid Corporation has a straight : 5868

**Question**

The Polaroid Corporation has a straight bond issue outstanding that is due in 22 years. The bonds pay interest semiannually and sell for 117% per bond. (The price is expressed as a percent of par. Par is $1,000.) The coupon (on an annual basis) is 7.8%. What is the effective yield to maturity to the bondholders (the yield expressed as an effective annual rate)? Answer as a percent to 4 decimal places. Do not include the percentage sign.

**Solution**

EAY doesn’t depend on the market price; it is calculated as if the bond were selling at par (and the coupons are reinvested at the coupon rate).

The YTM is the discount rate that equates the cash flows to the current market price; it is a bond equivalent yield, not an effective annual yield

So EAY is 7.8%