Question

In: Finance

Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course...

Bonds issued by the Coleman Manufacturing Company have a par value of $1,000, which of course is also the amount of principal to be paid at maturity. The bonds are currently selling for $690. They have 10 years remaining to maturity. The annual interest payment is 8 percent ($80).

Compute the yield to maturity. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Solutions

Expert Solution

Yield to maturity of (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 8.00%]

PMT

80

Market Interest Rate or Yield to maturity on the Bond

1/Y

?

Maturity Period/Time to Maturity [10 Years]

N

10

Bond Price [-$690]

PV

-690

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 (YTM) on the bond = 13.93%.

Therefore, the annual Yield to Maturity of the Bond will be 13.93%


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