Question

The (identical) citizens of Boomtown have $2 million to spend either on park maintenance or private goods. Each unit of park maintenance costs $10,000. (a) Graph Boomtownis budget constraint. (b) Suppose that Boomtown chooses to purchase 100 units of park maintenance. Draw the town's indifference curve for this choice. (c) Now suppose that the state government decides to subsidize Boomtown's purchase of park maintenance by providing the town with l unit of maintenance for every 2 units the town purchases. Draw the new budget constraint. Will Boomtown purchase more or fewer units of park maintenance? Will Boomtown purchase more or fewer units of the private good? Illustrate your answer and explain.

Answer 1

Example of a YTM Calculation

To get a better understanding of the YTM formula and how it works, let’s look at an example.

Assume that there is a bond on the market priced at $850 and that the bond comes with a face value of $1,000 (a fairly common face value for bonds). On this bond, yearly coupons are $150. The coupon rate for the bond is 15% and the bond will reach maturity in 7 years.

The formula for determining approximate YTM would look like below:

The approximated YTM on the bond is 18.53%.

Importance of Yield to Maturity

The primary importance of yield to maturity is the fact that it enables investors to draw comparisons between different securities and the returns they can expect from each. It is critical for determining which securities to add to their portfolios. It’s also useful in that it also allows the investors to gain some understanding of how changes in market conditions might affect their portfolio because when securities drop in price, yields rise, and vice versa.