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1、Chapter 15BONDS AND SINKING FUNDS15.3 Yield to Maturity on An Interest Payment Date1nYield to maturity: The discount rate that makes the present value of the bonds remaining cash flows equal to its purchase price. nIt represents the rate of return a bondholder will realize if the bond is held from t
2、he purchase date until maturity.2nIt is standard price to quote the YTM as a semiannually compounded nominal annual rate.n YTM is “locked in” by the price you pay for the bondthe higher the purchase price, the lower the bonds YTM.3ExampleA $1000 face value Province of Manitoba bond, bearing interest
3、 at 9.75% payable semiannually, has 11 years remaining until maturity. What is the bonds yield to maturity at its current market price of $1021?4Solution: F=$1000 b=9.75%/2=4.875% Fb=$10004.875%=$48.75 n=112=22 purchase price=$1021PMTFVnPV1/y+/-1021 1000 22 48.754.7195YTM = 24.7195% = 9.44%CPT5EXAMP
4、LE:A corporations financial condition may deteriorate to the point where there is some doubt about its ability to make future interest payments on its bonds or to redeem the bonds at maturity. Investors are then unwilling to buy the bonds at a price based on market rates of return on bonds of health
5、y corporations. The price of bonds of the financially distressed corporation will fall to a level determined more by the perceived risk than by the prevailing market rates of return. It is still useful to calculate the YTM on such “deep-discount” bonds. 6The YTM represents the rate of return the bon
6、ds purchaser will realize if (1) the corporation does manage to meet all scheduled payments on time, and (2) the bond is held until the maturity date.Calculate the YTM on the $1000, 9% coupon bonds of Beaucamp Corp., which are treating at $500. The bonds have 7 and years remaining until maturity. 7Solution: F=$1000 b=9%/2=45% Fb=$10004.5%=$45 n=7.52=15 purchase price=$500PMTFVnPV1/y+/-500 1000 15 4511.74YTM = 211.74% = 23.48%CPT8
