On December 20, 1994 the Nippon Telegraph & Telephone Corporation (NTT) issued ¥

Question

On December 20, 1994 the Nippon Telegraph & Telephone Corporation (NTT) issued ¥1 billion of 10-year debentures due December 20, 2004. The debentures carried a 4 3/4% coupon. They were priced at par, that is, they cost the investor ¥100 per ¥100 of face value. The entire amount of borrowed principal would be repaid at maturity. Interest would be paid annually upon the anniversary date of the issuance (i.e., on December 20th of each year). The debentures carried a AAA credit rating.

What was the yield to maturity of NTT’s debentures at the time of issuance? What would it have been if the bonds were priced at 99 instead of 100 (i.e., at 99% of face value)? at 101 instead of 100?

By 1996 yields on AAA yen debt maturing in 8 years had dropped to 3.00%. Given this yield to maturity, at what price should the NTT debentures have been selling?

Explanation / Answer

Approximate Yield to Maturity ={ Coupon payment + (Face Value-Market Price)/n}/(Face Value+Market price)/2 1. YTM @ the time of Issuance of the debenture = Coupon payment=4.75% =$ 4.75; Face Value =$ 100;Market Price = $ 100; n=10 yrs. Substituting these values in the above formula, we get YTM= {4.75+(100-100)/10}/(100+100)/2= 0.0475 ie. 4.75% 2. If the bonds were priced @99, YTM will be {4.75+(100-99)/10}/(100+99)/2= 0.0487 ie.4.87% 3. If the bonds were priced @101, YTM will be {4.75+(100-101)/10}/(100+101)/2=0.0463 ie. 4.63% 4. YTM= 3% ie. 0.03; n=8 yrs. Face value= $100 To find the Market Price ? 0.03= {4.75+(100-MP)/8}/(100+MP)/2 Solving for MP, we get Market Price= $ 112.50 Selling price of NTT debentures maturing in 8 yrs. @ 3% yield = $ 112.50

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