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Unformatted text preview: value of the future cash flows equal to the current price, we need to solve for r in the equation where price equals the present value of cash flows: PV(Cash flows) Price on bond 10 10 110   2 (1  r ) (1  r ) (1  r ) 3 113.6 The yield to maturity is the found by solving for r by making use of a spreadsheet, a financial calculator or by hand using a trail and error approach. 10 10 110   2 1.05 1.05 1.053 113.6 Thus, if the current price is equal to 113.6 the bond offers a return of 5 percent if held to maturity. The yield curve is a plot of the relationship between yield to maturity and the maturity of bonds. Figure 1: Yield curve Yield to maturity (%) 6 5 4 3 2 1 0 1 3 6 12 24 60 120 360 Maturities (in months) Download free ebooks at 19 Corporate Finance Present value and opportunity cost of capital As illustrated in Figure 1 the yield curve is (usually) upward sloping, which means that long-term bonds have higher yields. This happens because long-term bonds are subject to h...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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