Question 2 (1 point) Blue Crab, Inc. plans to issue new bonds, but is uncertain

Question

Question 2 (1 point) Blue Crab, Inc. plans to issue new bonds, but is uncertain how the market would set the yield to maturity. The bonds would be 15-year to maturity, carry a 12.11 percent annual coupon, and have a $1,000 par value Blue Crab, Inc. has determined that these bonds would sell for $1,185 each. What is the yield to maturity for these bonds? Round the answers to two decimal places in percentage form. Write the percentage sign in the "units" box). You should use Excel or financial calculator Your Answer: Answer units Save Page 2 of Next Page

Explanation / Answer

Yield to maturity is the rate at which bond price equals the present value of future interest and principle payments on the bond.

Using trail and error approach, at 9.72% calculated bond price equals the given price of 1185

Workings:

Interest amount: Principle 1,000 Coupon/stated Rate of interest 12.11% Frequency of payment(in months) 12 Interest amount 1000*0.1211*12/12= 121.1 Present value calculation: yield to maturity/Effective rate 9.72% Effective interest per period(i) 0.0972*12/12= 0.0972 Number of interest payments (n): Years to redemption 15 Interest payments per year 1 Total interest payments(n) 15 Cash flow Discount factor Discounted cash flow Interest payments-Annuity (9.72%,15 periods) 121.1 7.7292 936 Principle payments -Present value (9.72%,15 periods) 1,000 0.2487 249 Bond price 1,185 Face value 1,000 Premium/(Discount) 185

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