Chapter 11, Problem 7PROB

Summary Introduction

YTM is the yield to maturity. It is the rate earned by the investor if he holds the bond till maturity.

Calculate the YTM by using the following formula:

${\text{P}}_0=\frac{\text{INT}}{{\left(1+\text{YTM}\right)}^1}+\mathrm{...}+\frac{\text{INT}+\text{M}}{{\left(1+\text{YTM}\right)}^{\text{n}}}$

Where,

${\text{P}}_0$ is the current price of the bond,

${\text{r}}_{\text{d}}$ or YTM is the before tax cost of debt,

M is the par value or face value,

INT is the dollar interest payment,

N is the number of years of interest payment.

EE has outstanding bonds with interest payment is $20 in every 6 months, maturity 6 years, current price is $900. Compounding semiannual.