Question

4-11 Calculating the Promised YTM Evaluate the promised YTM for the bonds issued by Ford (F) and General Motors (GM). You may assume that interest is paid semiannually. Also, round the number of compounding periods to the nearest six months.

Calculate the annualized yield to maturity as the cost of debt.

Find the cost of debt for given credit rating, which can also use the cost of debt.

Ford Motor Company            

Coupon:          6.3750%

Maturity:         02/01/2029

Rating:             Baa1/BBB?

Price:             92.7840

General Motors Corporation

Coupon:          8.375%

Maturity:         07/15/2033

Rating:             Baa2/BBB?

Price:             106.1250

Answer 1

We use the current date as 1 April 2018 to compute the period to maturity

Ford Motor Company

FV= 100

Price= 92.784

Coupon= 6.375%* 100/2= $3.1875

N= 1 period in 2018+20+1 in 2029 = 22 semi annual periods

Semi annual YTM= =RATE(22,3.1875,-92.784,100) = 3.67%

Annualized YTM= 3.67%*2 = 7.34%

General Motors Corporation

FV= 100

Price= 106.125

Coupon= 8.375%* 100/2= $4.1875

N= 1 in 2018+30+2 in 2033= 33 semi annual periods

Semi annual YTM= =RATE(33,4.1875,-106.125,100) = 3.86%

Annualized YTM= 3.86%*2 = 7.71%