Answered: what is its yield-to-maturity?

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Finance

what is its yield-to-maturity?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 8P

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Question

A 15-year bond with a 10% annual coupon (interest paid semiannually) has a par value of $1,000. The bond will have a yield-to-call of 6.5% if it is called after 10 years at a call price of $1,050. If the bond is not called, what is its yield-to-maturity?

Expert Solution

Step 1

Bond valuation is a method of finding the fair value of the bond. Fair value means the present value of of the cash flows that it is expected to generate. Yield to maturity means the return generated from an instrument at its maturity. It is used for computing the income earned by the investor.

$M a r k e t p r i c e = \sum_{t = 1}^{n} \frac{C}{{(1 + Y T M)}^{t}} + \frac{F}{{(1 + Y T M)}^{t}}$

Where,

C = Coupon payment

F = Face value

YTM = Yield to maturity

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