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reading 35 - part practice question 22

Hi, I am having some issues calculating the cost of debt for the below :

Currently outstanding bonds     $2.4 million five-year bonds, coupon of 12.5 percent, with a market value of $2.156 million

The solution presented in the curriculum is as follows :

For debt: FV = 2,400,000; PV = 2,156,000; n = 10; PMT = 150,000

Solve for i. i = 0.07748. YTM = 15.5%

However , I am not getting the 0.07748 but a negative rate.

please help :)

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Check the signs on your inputs.  You want either:

  • FV = 2,400,000
  • PV = −2,156,000
  • PMT = 150,000

or else:

  • FV = −2,400,000
  • PV = 2,156,000
  • PMT = −150,000

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

It does indeed help, thanks s2000magician!! smiley

However this has raise another question :

I thought it was only 1 variable ( FV or PV) which had to be concerned with the -ve sign.

So, when do I have to use the -ve sign for FV or PV or PMT ?

The PV, FV, and PMT buttons are cash flow buttons.  Which numbers are positive and which are negative depends on the point of view that you adopt.

If you look at this problem from the point of view of the company issuing the bonds, the borrower, then PV is positive (they receive money today from issuing the bonds), PMT is negative (they pay coupons), and FV is negative (they pay the par value at maturity).

If you look at this problem from the point of view of the bondholder, the lender, then PV is negative (they pay money today to purchase the bonds), PMT is Positive (they receive coupons), and FV is positive (they receive the par value at maturity).

I encourage you to decide on a point of view – borrower or lender, it doesn’t matter – and always adopt that point of view when working these problems.  You’ll find that you make fewer mistakes that way.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

Thanks a lot for your help!!

It does clarify a lot :)

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/