XYZ Corporation, a publicly traded company, just posted results for fiscal year ended
ended September 20, 2009. Its audit opinion was unqualified. Its audited financial statements reflected net income of $75 million, total assets of $1 billion, and total liabilities of $500 million. Liabilities entirely comprised bonds issued October 31, 2004 at $1000 par for an original maturity of 10 years, paying fixed interest once annually. The bonds trade broadly, deeply, and vigorously in the secondary market. Net income has increased an average 2% per year for the last 15 years (since XYZ went public), never increasing more than 3% per year or less than 1% per year. XYZ is well-run in all respects and has consistently and efficientlyconverted earnings to cash flow.
How would you find the YTM of an xyz bond here?

ArcSine

Per the forum's homework-help guidelines, you need to first weigh in with your thoughts re the solution, and that'll trigger someone stepping up with some guidance. Cheers!

fall2009

Well we thought about looking at old bonds that where issued in 2004 and have a 10 year mat. our guess is 5%

ArcSine

Could be, comrade. You'd be correct if you're seeking the YTM from the original issue date. (The question doesn't specify.) That's because it's stated that they were issued at par, which tells you that their YTM, measured against their original issue price, equals their coupon rate.

On the other hand, the YTM can be expected to change for any investor buying the bonds on any post-issuance date. Here, the YTM is measured with respect to the post-issuance buyer. In such a case the YTM will be determined by the interest rate environment in effect at that time.

Notice that in neither case are you given the info you'd need to actually calc the YTM. I think the clue is in the wording of the question. It doesn't ask, "What is the YTM?"; rather it asks how you'd find it.