Understanding Yield to Maturity

a. The Yield to Maturity (YTM) is the nominal rate of return which investors would realize if they held the bond to maturity and the bond did not default.

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

Assuming the market interest rate on the issue date is 7%, the bonds will issue at $200,000. Record the bond issue on January 1, 2012, and the first two semi-annual interest payments on June 30, 2012, and December 31, 2012.

∆P/P = –D*(∆y) D* = D/(1 + y) = 7/1.073 = 6.52 ∆P/P = –D*(∆y) = –6.52(–0.09%) = .59% New price = $1,073(1.0059) = $1,079.33 Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

The Yield to Maturity (YTM) of a bond is:   Interest rate that makes the present value of the bond’s

Look at Warren Buffet, who is famous for investing only in companies and businesses that he understands. Certainly in the post-Madoff world, this is an important tenet. Not understanding how an investment proposes to give you a return is a big mistake. So the second key is: understanding.

Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts)

Coupon rate is fixed and determines what the bonds coupon will be. The required return is what investor actually demands on the issue and it will fluctuate through time.

One pro is that they offer meaningful advice. When people try to make healthy financial investments in their lives and can not decide what to they should do they come to a financial adviser who will give them education on how the person can make suitable decisions (Horton, 2017).

Answer: YTM should be used because it is the rate of return anticipated on a bond if it is held to maturity. The calculation of YTM takes into account the purchase price, redemption value, time to maturity, coupon yield, and time between

If Target issues 9% coupon bonds on 1/1/18 for $12,775,000 due 12/31/22 with semiannual interest payments on July 1st and December 31st, the company would receive $15,011,152 on the date of issuance (1/1/18). The present value of $15,011,152 was calculated using payments of $574,875 every 6 months, compounding for 10 periods, at the rate of 2.5% per period.

So, the 20 year corporate bond interest rate associated with the company’s rating is 3.86.

2. The discount rate for this bond would be 0.70%. I started with an appropriate discount rate to derive my bond purchase price, since I would not purchase a bond without finding out ahead of time what a good price should be.

Bond Discount represents an additional cost of borrowing and should be recorded as bond interest expense over the life of the bond. To follow the matching principle, bond discount is allocated to expense in each period in which the bonds are outstanding. This is referred to as amortizing the discount. Amortization of the discount increases the amount of interest expense reported each period. As the discount is amortized, its balance will decline and as a consequence, the carrying value of the bonds will increase, until at maturity the carrying value of the bonds equals their face amount. The journal entries are as follow:

     As and investor, you are overwhelmed with advice in newspapers, magazines, and mailings discussing what to invest in for a successful retirement nest egg, when to start saving for retirement and who to invest with. There are millions of people who realize that an investment portfolio for retirement is necessary, but do they really understand the investment instruments and the amount they must invest for tomorrow? The subject of retirement is a fascinating area but it also could be a fuzzy subject without the correct amount of knowledge, understanding and professional guidance. The number one question of concern for individuals facing retirement issues is whether or not they