Consider a ₹ 1,000 par value bond, whose current market price is ₹850/-. The bond carries a coupon rate of 8 percent and has a maturity period of nine years. What would be the rate of return that an investor earns if he

If Cost of Debt (kd) is the yield to maturity then, 850 = 80 (PVIFA kd per cent, 9 Years) + 1,000 (PVIF kd, 9 Years) = 80 (PVIFA 12 per cent, 9) + 1,000 (PVIF 12 per cent, 9) = 80 x 5.328 + 1,000 x (0.361) = 426.24 + 361 = ₹ 787.24 Since the above value is less than ₹ 850, a lesser rate of cost of debt (kd) may be considered i.e., 10%. = 80 (PVIFA 10 per cent, 9) + 1,000 (PVIF 10 per cent, 9) = 80 x 5.759 + 1.000 * 0.424 = 884.72 From the above, it is clear that kd lies between 10% and 12%. Now use linear interpolation in the range of 10% and 12%. Using it, find that kd is equal to the following: (884.72-850)/(884.72-787.24) 34.72/97.48 = 10% +0.71 = 10.71% Therefore, the yield to maturity is 10.71%