THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 101

CHAPTER A PP LI CATI O N Understanding Interest Rates 69 Yield to Maturity on a Perpetuity What is the yield to maturity on a bond that has a price of $2000 and pays $100 annually forever? Solution The yield to maturity would be 5% ic * C Pc where C * yearly payment * $100 Pc * price of perpetuity (consol) * $2000 Thus $100 $2000 ic * 0.05 * 5% ic * To solve using the Texas Instruments BA-35 Solar calculator: Enter 2000 and push the PV key Enter and push the FV key Enter 999 (to approximate an infinite number of payments) and push the N key Enter 100 and push the PMT key Push the CPT and %i keys The answer is sent value of the $1000 received in one year, using Equation (page 60), gives $900 * $1000 + i and solving for i, (1 + i ) * $900 * $1000 $900 + $900i * $1000 $900i * $1000 + $900 i* $1000 + $900 * 0.111 * 11.1% $900