Yield to put, Financial Management

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                                          

Posted Date: 9/10/2012 1:58:39 AM | Location : United States







Related Discussions:- Yield to put, Assignment Help, Ask Question on Yield to put, Get Answer, Expert's Help, Yield to put Discussions

Write discussion on Yield to put
Your posts are moderated
Related Questions
Define the concept of a real option. Discuss some real options a firm can be confronted with when investing in real projects. A positive APV project is accepted under the supposi

Revenues Revenues are the gross income received before any deductions for discounts, expenses, returns, and so on. It is also called sales in most organization. A much less c

The Selling Process The four key elements that constitute the selling process are: (i) identification of prospective buyers, (ii) selection of the type of selling process to be

Yield to call is the yield that would be realized on a callable bond assuming the issuer of the bond redeems it before maturity. A bond's call provision is detail

As the CEO of PG Industries, you are hired at the pleasure of the Board of Directors, who in turn are elected by the shareholders. You are considering Project A which you are convi

Consumer Advisory Panel (CAP) of ASIC It was established in 1998. Its role is to advise ASIC on current consumer protection issues and give feedback on ASIC policies and activi

Accounting Principle Accounting principles are the primary assumptions, rules of operation, and necessary features that make up the framework for the construction of accountin

How does the market determine the fair value of a bond? The bond’s fair value is the present value of the bond's coupon interest payments plus the present value of the face value

This is the part of after-tax personal income that is not spent.

Present V alue This is the current value of a future payment or stream of payments. The present value is calculated by applying a discount (capitalization) rate to the