Question

You are analyzing the cost of debt for a firm. You know that the firm’s 14-year...

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%.)

Homework Answers

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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