CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Question
Chapter 6, Problem 14PROB
Summary Introduction
Bond has a face value of $1,000 currently trading at $1,046.The bond has a coupon rate of 8.5% paid semi-annually with 17 years left to maturity.
Yield to maturity (YTM) of a bond is the required
YTM calculation is a trial and error process, however, we can calculate YTM using a financial calculator as follows:
INT = PMT = coupon amount
FV = M = maturity value
PV = Price of the bond (input as a negative value)
N = number of periods
Yield to Call (YTC) on the other hand, is the rate of return which the investors expect if the bond is redeemed or called before the maturity period. YTC is generally higher than YTM, since the bondholders are not able to earn interest on the period between the time when bond is called and the maturity time. The calculation is same as the YTM of the bond except that in the maturity value, call price of the bond is used
We can calculate YTM using a financial calculator as follows:
INT = PMT = coupon amount
FV = CP = call price
PV = Price of the bond (input as a negative value)
N = number of periods
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