THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 101

CHAPTER 4

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:
1. Enter 2000 and push the PV key

2. Enter 0 and push the FV key
3. Enter 999 (to approximate an infinite number of payments) and push the N key
4. Enter 100 and push the PMT key
5. Push the CPT and %i keys
The answer is 5.

sent value of the $1000 received in one year, using Equation 1 (page 60), gives
$900 *

$1000
1 + i

and solving for i,
(1 + i ) * $900 * $1000
$900 + $900i * $1000
$900i * $1000 + $900
i*

$1000 + $900
* 0.111 * 11.1%
$900