Question

1. For a consol that pays $100 annually, if the yield to maturity at the beginning of the year is 10%, and the yield to maturity at the end of the year is 5%, please calculate the return of the consol of this year.

Answer 1

the consol's annual return is 5%.

Step-by-step explanation:

Annual Payment / Current Price = Return, where Annual Payment is the amount that the corporation pays each year, and Current Price is the corporation's present worth.

Annual Payment / Yield to Maturity = Present Value

Given that the convertible debt has a $100 yearly payment and a 10% yield to maturity at the start of the year, the present value of the convertible debt is as follows:

Present Value: 100 / 0.10 = $1000

Similar to this, when the yield to maturity is 5%, the present value of the capital at year's end is:

Present Value: $100 / 0.05 = $2000

As a result, the following formula can be used to get the consol's annual return:

Return = Annual Payment / Current Price Return = $100 / (($1000 + $2000) / 2) = 5%