Question

In: Finance

Yes They May, Inc. has a bond issue outstanding with a $1,000 par value and a...

Yes They May, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 17 years. The bonds have an annual coupon rate of 14.0% with semi-annual coupon payments. The current market price for the bonds is $922. The bonds may be called in 4 years for 114.0% of par. What is the quoted annual yield-to-maturity for the bonds?

Solutions

Expert Solution

Quoted annual Yield to maturity (YTM) of the Bond

  • The Yield to maturity of (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 14.00% x ½]

PMT

70

Market Interest Rate or Yield to maturity on the Bond

1/Y

?

Maturity Period/Time to Maturity [17 Years x 2]

N

34

Bond Price [-$922]

PV

-922

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 semi-annual yield to maturity (YTM) on the bond = 7.65%.

The semi-annual Yield to maturity = 7.65%.

Therefore, the annual Yield to Maturity of the Bond = 15.30% [7.65% x 2]

“Hence, the Quoted annual Yield to maturity (YTM) of the Bond will be 15.30%”


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