Find the best answers to your questions at Westonci.ca, where experts and enthusiasts provide accurate, reliable information. Get detailed answers to your questions from a community of experts dedicated to providing accurate information. Get quick and reliable solutions to your questions from a community of experienced experts on our platform.

It is now January 1, 2018, and you are considering the purchase of an outstanding bond that was issued on January 1, 2016. It has a 9% annual coupon and had a 20-year original maturity. (It matures on December 31, 2035.) There is 5 years of call protection (until December 31, 2020), after which time it can be called at 109-that is, at 109% of par, or $1,090. Interest rates have declined since it was issued, and it is now selling at 114.12% of par, or $1,141.20. What is the yield to maturity

Sagot :

Answer:

YTM is 7.54%.

Explanation:

The yield to maturity can be calculated using the following RATE function in Excel:

YTM = RATE(nper,pmt,-pv,fv) .............(1)

Where;

YTM = yield to maturity = ?

nper = number of periods = number of years to maturity = original maturity number of years - number of years between January 1, 2016 and January 1, 2018 = 20 - 2 = 18

pmt = annual coupon payment = face value * annual coupon rate = 1000 * 9% = 90 (Note: This is an inflow to the bondholder and it is therefore a positive figure).

pv = present value = current bond price = -1141.20 (Note: This is an outflow to the buyer of the bond and it is therefore a negative figure).

fv = face value of the bond = 1000 (Note: This is an inflow to the bondholder and it is therefore a positive figure).

Substituting the values into equation (1), we have:

YTM = RATE(18,90,-1141.20,1000) ............ (2)

Inputting =RATE(18,90,-1141.20,1000) into excel (Note: as done in the attached excel file), the YTM is obtained as 7.54%.

Therefore,  YTM is 7.54%.

View image amcool
We hope this was helpful. Please come back whenever you need more information or answers to your queries. We hope you found this helpful. Feel free to come back anytime for more accurate answers and updated information. Thank you for visiting Westonci.ca, your go-to source for reliable answers. Come back soon for more expert insights.