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Chapter 5: 12BP (page 529)

Assume a zero-coupon bond that sells for \(403 and will mature in 10 years at \)1,250. What is the effective yield to maturity? (Compute PVIF and go to Appendix B for the 10-year figure to find the answer, or compute FVIF and go to Appendix A for the 10-year figure to find the answer. Either approach will work.)

Short Answer

Expert verified

The yield to maturity is computed as 11.99%

Step by step solution

01

Definition of bond

Bonds are defined as financial instruments which are issued by a big corporation and government companies in the form of debt to raise the funds to meet their capital requirements.

02

Computation of yield to maturity

FV=PV×(1+r)n1,250=403×(1+r)nr=11.99%

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Most popular questions from this chapter

Discuss how an underwriting syndicate decreases risk for each underwriter and at the same time facilitates the distribution process.

Question: The Bowman Corporation has a \(18 million bond obligation outstanding, which it is considering refunding. Though the bonds were initially issued at 10 percent, the interest rates on similar issues have declined to 8.5 percent. The bonds were originally issued for 20 years and have 10 years remaining. The new issue would be for 10 years. There is a 9 percent call premium on the old issue. The underwriting cost on the new \)18,000,000 issue is \(530,000, and the underwriting cost on the old issue was \)380,000. The company is in a 35 percent tax bracket, and it will use an 8 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.

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