Lecture4

Introduction to Real Estate Finance and Investments 11.431/15.426 Walter N. Torous Center for Real Estate MIT Fall 2023 1 / 33

Yield to Maturity I Given a coupon bond's price ( P ) and contractually stipulated payments, we may determine its yield to maturity, y . I If we assume that coupon interest is paid annually and the next coupon payment will be made twelve months from today: P = C ( 1 + y ) + C ( 1 + y ) 2 + . . . + C ( 1 + y ) n + F ( 1 + y ) n where P ≡ price C ≡ annual coupon payment y ≡ annualized required yield n ≡ number of twelve month periods F ≡ face value I Must be done numerically 2 / 33

I Example : Walt Disney's Sleeping Beauty Bonds The Walt Disney Company issued $300,000,000 in senior debentures (bonds). The debentures carried an interest rate of 7.55% and were priced at "par". They were due to be repaid a full one hundred years after the date of their issue. I The Sleeping Beauty bonds' yield when issued was 7.55%: $ 100 = $ 7 . 55 ( 1 + y ) + $ 7 . 55 ( 1 + y ) 2 + . . . + $ 7 . 55 ( 1 + y ) 100 + $ 100 ( 1 + y ) 100 ⇒ y = RATE ( 100 , 7 . 55 , - 100 , 100 ) = 0 . 0755 . 3 / 33