Question

Shawn is selling his $2 million face value 6.0% Starbucks bond that matures 12/1/30. Assume the sale takes place today, 11/20/19. What is the yield to maturity on the bond if the price he receives is 90?

How much will Shawn receive for the sale of his bond?

Answer 1

Calculation of yield to maturity

Given:

Face Value of bond = $100 (Assumed in the absence of information)

Coupon Rate = 6%

Maturity Years = 11 years

Current Price of Bond = 90

With this data given in the question, yield to maturity could be found out using the IRR technique that is internal rate of return. In this we will follow the hit and trial method to arrive at the figure of yield to maturity.

Let IRR be 10%

Therefore we have,

90=Interest (PVAF (r%, 11 yrs) + Maturity Value (PVF (r%, 11th year)

90= 6(PVAF (10%, 11 yrs) + 100 (10%, 11th year)

90= (6 * 6.494) + (100 * 0.35)

90 = (38.964 + 35)

Therefore we have Net Present Value to be +16.036

Now Let us assume IRR to be 5%

Therefore we have,

90=Interest (PVAF (r%, 11 yrs) + Maturity Value (PVF (r%, 11th year)

90= 6(PVAF (5%, 11 yrs) + 100 (5%, 11th year)

90= (6 * 8.308) + (100 * 0.585)

90 = (49.848 + 58.50)

Therefore we have Net Present Value to be -18.348

Using IRR we have,

Lower Rate + Lower Rate NPV / Lower Rate NPV - Higher Rate NPV * (Higher Rate - Lower rate)

5% + -18.348/-18.348-16.036 * (10% - 5%)

= 7.668% or 7.67 %

Receipt on sale of bond

Shawn will receive 20000*90 that is $1800000 if he sells the bond as the current market price of bond is 90 as given in question and face value is assumed to be $100.