Yield to Maturity on An Interest Payment Date参考.ppt

Chapter 15BONDS AND SINKING FUNDS 15.3 Yield to Maturity on An Interest Payment Date Yield to maturity: The discount rate that makes the present value of the bond’s remaining cash flows equal to its purchase price. It represents the rate of return a bondholder will realize if the bond is held from the purchase date until maturity. It is standard price to quote the YTM as a semiannually compounded nominal annual rate. YTM is “locked in” by the price you pay for the bond—the higher the purchase price, the lower the bond’s YTM. * * Example A $1000 face value Province of Manitoba bond, bearing interest at 9.75% payable semiannually, has 11 years remaining until maturity. What is the bond’s yield to maturity at its current market price of $1021? Solution: F=$1000 b=9.75%/2=4.875% Fb=$1000×4.875%=$48.75 n=11×2=22 purchase price=$1021 PMT FV n PV 1/y +/- 1021 1000 22 48.75 4.7195 YTM = 2×4.7195% = 9.44% CPT EXAMPLE: A corporation’s 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 healthy 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.