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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

YIELD TO MATURITY A firm’s bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,154, and currently sell at a price of $1,283.09. What are their nominal yield to maturity and their nominal yield to call? What return should investors expect to earn on these bonds?

Summary Introduction

To determine: Yield to maturity (YTM).

Yield to Maturity:

Yield to maturity is the rate of interest earned till the maturity of the bond by the bondholder.

Explanation

Given,

Semiannual coupon rate is 5.5% or 0.055.

Selling price (value of bond) is $1,283.09.

Par value of bond is $1,000.

Maturity is after 4 years.

Yield to maturity

Yield to maturity (YTM) can be calculated through value of bond.

Formula to calculate present value of bond,

Bond'svalue=t=1NINT(1+rd)t+Parvalue(1+rd)N

Where,

  • INT is the interest rate.
  • N is the number of year for maturity.
  • Rd is rate of discount.

Table (1)

Yield to maturity half yearly is 3.21%. Annual yield to maturity is,

Yeildtomaturity=3.21%×2=6.42%

Yield to call

Yield to call can be calculated through value of bond

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