Mba 503 Yeild to Maturity

Running head: YIELD TO MATURITY

Yield to Maturity

University of Phoenix

MBA 503: Introduction to Finance and Accounting

Yield to Maturity

It is clear that my coworker does not understand the yield to maturity concept as it applies to bonds; that is, based on the conversation she is having with her broker. The concept of yield to maturity for bonds centers on the time-value-of-money methods. In this paper the concept of yield to maturity will be discussed.

Yield to maturity concept

The conflict centers on the fact that my coworker purchased a bond at 10%. Conversely, the bond’s yield to maturity is no longer 10%. Block and Hirt (2005) state the yield to maturity, or discount rate, is the rate of return required by bond-holders (p 4). Her broker has continued to reiterate that the bond has a 9% yield. The broker’s insight has not distracted my coworker’s attention from the fact that the bond was purchased at 10%.

The challenge in this scenario is for my coworker to understand the current value of the bond in her possession. Block and Hirt (2005) state:

the price, or current value, of a bond is equal to the present value of interest payments (It)

over the life of the bond plus the present value of the principal payment (Pn) at maturity.

The discount rate used in the analytical process is the yield to maturity (Y). The yield to

maturity (required rate of return) is determined in the marketplace by such factors as the

real rate of return, an inflation premium, and a risk premium (P 25).

Having shared this information with said coworker, the goal remains to determine her understanding. The current objective is to ensure that she understands the information that has been disseminated to her. Therefore, she will be better able to grasp the how the 9% yield effects her bond’s value in the current marketplace.

Conclusion

In attempting to facilitate my coworker’s ability to understand the concept of yield to maturity, it was necessary...