banafsheh yengejeh Blueprint Problems Activity Information 159 PM POT calculating melds Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of returm an investor would earn ifthat investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to A bond's current yield iscalculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield bo call, it does not represent the actual retum that investors should expect because it doe not account for the capital gain or loss that will be realized fthe bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading the yield to maturity and yield to call are more relevant. The yield to maturity (TM) is the rate of returm earned on a bond it is held to maturity. It is the interest rate that foroes the present value of the bond to equal the present values of the interest payments received during the ire of the bond and the maturity value received at the bond's maturity. Calculate YTM using a financial calculator by entering the number of a payment periods until maturity for N, the price of the bond for Pv, the interest payments for PMT, and the maturity value for Fv. Then solve for unR nM. Remember, you need to make the appropriate adjustments for a semiannual bond and realize that the calculated LMR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and Fvare identical and that the opposite sgn is used for Pv; otherwise, your answer wll be incorrect. The yield to call mco is the rate of retum earned on a bond when it is cated before its maturity date. The equation for solving for the mcis shown below: Price of bond -DNT Cau price calculate mc using a financial calculator by entering the number of payment periods until for N, the price of the bond for PV, the interest payments for PMT, and the call price for Fv call vou Then you can solve for inrR YTc. Again, remember you need to make the appropriate adjustments for a semiannual bond and real that the calculated LYR is on a periodic basis so wil need to multiply the rate by 2 to obtain the annual rate. In addtion, you need to make sure that the signs for PMT and Fv are identical and the opposite sign is used for your answer will be incorrect. A company is more likely to call its bonds they are able to replace their rrent high-coupon debt with less expensive finand A bond is more likely to be caled ir its price is select- r-because this means that the going market interest rate is less than its coupon rate. banafsheh yengejeh Blueprint Problems Activity Information 159 PM POT calculating melds Unlike the coupon interest rate, which is fixed, a bond's yield varies from day to day depending on market conditions. To be most useful, it should give us an estimate of the rate of returm an investor would earn ifthat investor purchased the bond today and held it for its remaining life. There are three different yield calculations: Current yield, yield to maturity, and yield to A bond's current yield iscalculated as the annual interest payment divided by the current price. Unlike the yield to maturity or the yield bo call, it does not represent the actual retum that investors should expect because it doe not account for the capital gain or loss that will be realized fthe bond is held until it matures or is called. This yield was popular before calculators and computers came along because it was easy to calculate; however, because it can be misleading the yield to maturity and yield to call are more relevant. The yield to maturity (TM) is the rate of returm earned on a bond it is held to maturity. It is the interest rate that foroes the present value of the bond to equal the present values of the interest payments received during the ire of the bond and the maturity value received at the bond's maturity. Calculate YTM using a financial calculator by entering the number of a payment periods until maturity for N, the price of the bond for Pv, the interest payments for PMT, and the maturity value for Fv. Then solve for unR nM. Remember, you need to make the appropriate adjustments for a semiannual bond and realize that the calculated LMR is on a periodic basis so you will need to multiply the rate by 2 to obtain the annual rate. In addition, you need to make sure that the signs for PMT and Fvare identical and that the opposite sgn is used for Pv; otherwise, your answer wll be incorrect. The yield to call mco is the rate of retum earned on a bond when it is cated before its maturity date. The equation for solving for the mcis shown below: Price of bond -DNT Cau price calculate mc using a financial calculator by entering the number of payment periods until for N, the price of the bond for PV, the interest payments for PMT, and the call price for Fv call vou Then you can solve for inrR YTc. Again, remember you need to make the appropriate adjustments for a semiannual bond and real that the calculated LYR is on a periodic basis so wil need to multiply the rate by 2 to obtain the annual rate. In addtion, you need to make sure that the signs for PMT and Fv are identical and the opposite sign is used for your answer will be incorrect. A company is more likely to call its bonds they are able to replace their rrent high-coupon debt with less expensive finand A bond is more likely to be caled ir its price is select- r-because this means that the going market interest rate is less than its coupon rate