As the director of Finance for Sunset Boulevard Corp, you have been asked by the

Question

As the director of Finance for Sunset Boulevard Corp, you have been asked by the Ms. Desmond, the head of the management team to pinpoint the yield to maturity for each of the following three debt securities and recommend, in order of priority from highest to lowest based strictly on YTM (yield to maturity), your assessment for purchase.

Will Holden, LLC bonds have 15 years until they mature and were issued with a coupon of 11.39%. Today they can be purchased for $1,146.82, but will only pay $1,000 at their maturity.

Explanation / Answer

Let the yield to maturity be r% Discounting all the cash flows(Coupon payments every year @11.39% and the final $1000 at maturity) at r%, you should obtain the price $1,146.82 Use a Finance Calculator to input the cashflows CF0=(-1146.82) at t=0, CF1/CF2/.../CF14=113.9 for t=1,2,...14 and CF15 = 1000+113.9=1113.9 at t=15 Now calculate the Internal Rate of Return which is the r. We get r = 9.531%

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