What are Yield to Maturity (YTM) and Yield to Call (YTC)?
By calculating the present and future value of bonds, managers can make sound decisions about their potential strengths and weaknesses as investments.
Answer the following questions in this week’s Discussion 2 thread:
1. What terms (or inputs) are needed to calculate yield to maturity (YTM)? How does this compare to calculating yield to call (YTC)?
To calculate the YTM you will need to use Annual Interest, Par value, Market Price and the number of years to maturity.The yield to maturity is the bond’s promised rate of return, which is the return that investors will receive if all the promised payments are made. The yield to call is the rate of return earned on a bond if it is called before its maturity date. Call price is the price the company must pay in order to call the bond.
2. Provide the steps taken to calculate YTM using a calculator or MS Excel. To calculate the YTM you will need to find the I/YR. Select The number of years is N=14 , The price of bond is PV= -1494.93 , Coupon amount PMT=100, and Par valueFV=1000. Press compute CPT, I/Y. which will -= 5 percent 3. Calculate Problem 7-2, at the end of Chapter 7 in your text, Fundamentals of Financial Management, and show your work.
Current Yield = Coupon Amount / Current price, equals 70/985 = 7.11% YTM = 7.22 (N = 10, PV = -985, PMT = 70,FV = 1000, I/YR = ?) PV = -988.23 (N = 7, PV = ?, PMT = 70, FV = 1000, I/YR = 7.22 %)
4. Find a bond on the Wall Street Journal or other online service and calculate its YTM. Show your calculations. Explain why your bond is trading at a premium or discount based on current market conditions. How does bond pricing help forecast future interest rates, or does it? Why? Home Depot is the bond I selected .Using the bond profile they have a current bond price of 111.47, maturity date of 2040, 95 bonds available, and a coupon rate of 5.4% I/yr = 4.69% The bond is selling at a premium rate because is selling above its par value. The coupon rate was 5.4% and ytm is 4.69