Yield to put, Financial Management

Assignment Help:

Yield to put is the rate at which the present value of cash flow to the first put date is equal to the price plus interest rate. It is used for putable security. It is also similar to yield to call. The assumptions under the yield to put calculation are:

  • Any interim coupon payment can be reinvested at the yield calculated.

  • The bond will put on the first put date.

For example, assume a Rs.100 par value, 7% 5-year bond is selling for Rs.104.66 and putable at par at the end of three years. If the bond is put at the end of three years then the cash flow will be like this:

Table 1: Showing Cash Flows in Different Year

Year

Receipts

Total Receipts in the Year Rs.

1st year

Two coupons of Rs.3.50 each

7

2nd year

Two coupons of Rs.3.50 each

7

3rd year

Two coupons of Rs.3.50 each + put price 100.00

107

The present value for interest rates is shown in table 6. It is very clear from the table that 5.30% annual rate makes the present value of the cash flow equal the price of Rs.104.66. So 5.30% is the yield to put.

Table 2

Annual Interest Rate (%)

Semiannual Interest Rate (%)

Summated PV of 6 Cash Flow Payments of Rs.3.50 each (Rs.)

PV of Rs.100.00
(Rs.)

PV of
Cash Flow (Rs.)

4.90

2.45

19.3107

86.48

105.79

5.10

2.55

19.2462

85.98

105.22

5.20

2.60

19.2141

85.73

104.94

5.30

2.65

19.1821

85.48

104.66                                          


Related Discussions:- Yield to put

Financial management assignment, You have just had your 30 th birthday. Yo...

You have just had your 30 th birthday. You have two children. One will go to college 12 years from now and require four yearly payments for college expenses of RM11,000, RM12,000

Interest rate risk in financial management, Q. Interest Rate Risk in financ...

Q. Interest Rate Risk in financial management Interest rate risk is the variation in the single period rates of return caused by the fluctLlaoons in the market interest rate. M

Explain the savage friedman hypothesis, Question: (a) Describe the axio...

Question: (a) Describe the axioms of utility. (b) An economic agent has a logarithmic utility function, U(W) = lnw and has initial wealth $20,000. She is offered the sub

Computation of overall cost of capital, Q. Computation of overall Cost of C...

Q. Computation of overall Cost of Capital? Computation of Value of the Firm (V) & Overall Cost of Capital when debt is lowered to Rs, 1, 00,000 When the debt is lowered to R

Forward start option and a chooser option, When a company commits (implicit...

When a company commits (implicitly or explicitly) to granting at-the-money options to employees in the future then we can view them as a forward start options. a) Explain the di

Foreign exchange rates, Foreign Exchange Rates The proportional va...

Foreign Exchange Rates The proportional value of one currency to other, used to exchange currency from one denomination to another.  For example, one British pound is wort

What do you mean by credit policy, Q. What do you mean by Credit policy? ...

Q. What do you mean by Credit policy? Credit policy: the credit policy of the concern in its dealing with the debtors and the creditors influencly consider the requirement of t

Estimate the money in dollars have lost or gained, In January 2010 your fir...

In January 2010 your firm bought from an Italian firm goods payable in Euros worth EU2,000,000.  Suppose that at that time the exchange rate of the Euros was 1EU=$1.25.  Because th

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd