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In December of 2005, the Eastman Kodak Corporation (EK) had a straight bond issue outstanding that was due in eight years. The bonds are selling for 108.126%, per bond and pay a semiannual interest payment based on 7.25% (annual) coupon rate of interest. Assume that the bonds remain outstanding until maturity and that the company makes all promised interest and principal payments in a timeley basis. What is the YTM to maturity to the bondholders in December of 2005?

Respuesta :

Answer:

Yield to maturity = 6.42%

Explanation:

The yield to maturity (YTM) can be calculated using the following RATE function in

Excel:

YTM = RATE(nper,pmt,-pv,fv) .............(1)

Where;

YTM = yield to maturity = ?

nper = number of periods = Number of semiannuals = Number of years * Number of semiannuals in a year = 8 * 2 = 16

pmt = semiannual coupon payment = face value * semiannual coupon rate = 1000 * 7.25% = 72.50 (Note: This is an inflow to the bondholder and it is therefore a positive figure).

pv = present value = current bond price = -$1,000 * 108.126% = -1,081.26 (Note: This is an outflow to the buyer of the bond and it is therefore a negative figure).

fv = face value of the bond = 1000 (Note: This is an inflow to the bondholder

and it is therefore a positive figure).

Substituting the values into equation (1), we have:

RATE(16,72.20,-1081.26,1000)

YTM = RATE(16,72.50,-1081.26,1000) ............ (2)

Inputting =RATE(16,72.50,-1081.26,1000) into excel (Note: as done in the

attached excel file), the YTM is obtained as 6.42%.

Therefore, YTM is 6.42%.

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