Question

You are analyzing the cost of debt for a firm. You know that the firm’s 14-year maturity, 8.2 percent coupon bonds are selling at a price of $745.28. The bonds pay interest semiannually. If these bonds are the only debt outstanding for the firm, answer the following questions.

What is the current YTM of the bonds? **(Round final
answer to 2 decimal places, e.g. 15.25%.)**

Answer #1

Calculating YTM

Par Value |
$1,000 |

Coupon Rate |
8.20% |

Coupons Frequency |
2 |

Maturity |
14 |

Market Price |
$745.28 |

Hence payment:

Period | Payment |

0 | -745.28 |

1 | 41 |

2 | 41 |

3 | 41 |

4 | 41 |

5 | 41 |

6 | 41 |

7 | 41 |

8 | 41 |

9 | 41 |

10 | 41 |

11 | 41 |

12 | 41 |

13 | 41 |

14 | 41 |

15 | 41 |

16 | 41 |

17 | 41 |

18 | 41 |

19 | 41 |

20 | 41 |

21 | 41 |

22 | 41 |

23 | 41 |

24 | 41 |

25 | 41 |

26 | 41 |

27 | 41 |

28 | 1041 |

Therefore Return for a period=6.0%

We can calculate using the Excel formula 'IRR'

Hence YTM(Yield To Maturity) =6.0*2(Coupon Frequency)

=12.00%

Another method is using the below formula for calculating YTM to arrive at the approximate value

Formula =

YTM= | C+((F-P)/N) |

(F+P)/2 |

where C=Coupon

F=Face Value

P=Present Value

Hence YTM = ~12%

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