Question

Bavarian Pretzel Haus is going to finance a new pretzel factory using a debt issue. The company needs to raise $10.00 million today. An investment bank has suggested issuing 10-year bonds, with a 7.00% APR semi-annual coupon, and a face value of $13.00 million. What yield to maturity is the investment bank placing on Bavarian Pretzel Haus bonds if they offer with these terms (Express as an EAR)?

Answer 1

- Face Value of Bond to raise = $13.00 million

Semi-annual coupon payment = $13.00 million*7%*1/2 = $0.455 million

No of Coupon Payments = No of years to maturity*2 = 10 years*2

= 20

Current Price of Bond's to raise = $10 million

Calculating Semi-annual Yield to maturity(YTM) using Excel "RATE" function:-

  

Semi-annual YTM = 5.4179%

Annual YTM = 5.4179%*2 = 10.84%

Calculating Effective Annual Yield(or EAR) of YTM:-

EAR = (1+Semi-annual YTM)^2 - 1

EAR = (1+0.054179)^2- 1

EAR = 11.13%

So, Yield to Maturity (expressed as EAR) is 11.13%

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