Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have...

Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $900. What is their yield to maturity?

Can you please assist.

Solutions

Expert Solution

Yield to maturity (YTM) of the Bond

· The cost of debt for use in the WACC calculation id the after-tax Yield to maturity of the Bond

· The Yield to maturity (YTM) of the Bond is the discount rate at which the Bond’s price equals to the present value of the coupon payments plus the present value of the Face Value/Par Value

· The Yield to maturity of (YTM) of the Bond is the estimated annual rate of return expected by the bondholders for the bond assuming that the they hold the Bonds until it’s maturity period/date.

· The Yield to maturity of (YTM) of the Bond is calculated using financial calculator as follows (Normally, the YTM is calculated either using EXCEL Functions or by using Financial Calculator)


Variables	Financial Calculator Keys	Figure

Par Value/Face Value of the Bond [$1,000]	FV	1,000
Coupon Amount [$1,000 x 10.00%]	PMT	100
Market Interest Rate or Yield to maturity on the Bond	1/Y	?
Maturity Period/Time to Maturity [10 Years]	N	10
Bond Price/Current market price of the Bond [-$900]	PV	-900

We need to set the above figures into the financial calculator to find out the Yield to Maturity of the Bond. After entering the above keys in the financial calculator, we get the annual yield to maturity on the bond (1/Y) = 11.75%.

Therefore, the Yield to maturity (YTM) of the Bond is 11.75%

jeff jeffy answered 1 year ago

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