A promissory note is sold for $90 per hundred and pays interest of 5% annually for 10 years. What is the yield on the promissory note over the 10-year period? Thanks for any help.
The yield on a promissory note is the same as bonds.
1-We find a rate that equate the PV of $5 stream of payments PLUS the PV of the par value of the note, which is $100, to the purchase price of the note, or $90.
2- These two formulae are used:
PV=P{[1 + R]^N - 1.[1 + R]^-N} R^-1=PV OF $1 PER PERIOD-This is for the stream of $5 payments.
PV=FV[1 + R]^-N=PV OF $1 IN THE FUTURE-This is for the par value of $100
3-Through iteration and interpolation of a few cycles, we find that the yield of this promissory note comes to:6.383471%.
