A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 11.5. The bonds have a current value of $1120 and will mature in ten years. The firm's marginal tax rate is 34%. Using the time value of money, calculate the yield to maturity on a financial calculator.
A bond that has a $1000 par value (face value) and a contract or coupon interest rate of 11.5. The bonds have a current value of $1125 and will mature in ten years. The firm's marginal tax rate is 34%. The cost of capital from this bond debt is %. ?
To calculate the yield to maturity (YTM) of a bond using a financial calculator, you need to follow these steps:
1. Determine the present value of the bond: In this case, the bond's current value is given as $1120.
2. Determine the future value (par value) of the bond: The bond has a par value of $1000.
3. Determine the number of years until maturity: The bond will mature in ten years.
4. Determine the coupon interest rate: The bond has a coupon interest rate of 11.5.
5. Determine the marginal tax rate: The firm's marginal tax rate is given as 34%.
Now, let's input these values into the financial calculator to calculate the yield to maturity.
1. Press the "PV" (present value) key and enter -$1120. Since the bond's current value is negative, you need to input a negative sign.
2. Press the "FV" (future value) key and enter $1000. No negative sign is required, as it represents a future payment.
3. Press the "N" (number of periods) key and enter 10, representing the number of years until maturity.
4. Press the "I/Y" (interest rate) key and enter 0. The initial interest rate is unknown, so you will leave it as 0 for now.
5. Press the "PMT" (payment) key and enter $115 ($1000 * 11.5%), as it represents the annual coupon interest payment.
6. Press the "CPT" (compute) key and then the "I/Y" key. The calculator will compute the yield to maturity, which represents the interest rate required to make the present value of the bond equal to its current value.
The result will be the yield to maturity of the bond, which represents the effective interest rate the bondholder will earn over the ten-year period, considering the current price, coupon payments, and par value.