Question #265062

1. A firm raises capital by selling $20,000 worth of debt with flotation costs equal to 2% of its par value. If the debt matures in 10 years and has a coupon interest rate of 8%, what is the bond's YTM?

Expert's answer

Par value of the bond = $20,000

Present value of bond = $20,000 * 2% = $19,600

Number of years to maturity of the bonds = 10 years

Coupon rate = 8%

Coupon amount = 8%*$20,000 = $1,600

"Bond \\; YTM = \\frac{Coupon + \\frac{Face \\;Value - Price }{Number \\;of \\;years \\;to \\;maturity}}{\\frac{Face \\;Value + Price}{2}}\\\\\n\n=\\frac{1600 + \\frac{20000 - 19600 }{10}}{\\frac{19600 + 20000}{2}}\\\\\n\n=\\frac{1600+40}{19800}\\\\\n\n=0.0828282"

YTM=8.28%

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