Yield to put is the rate at which the present value of cash flow to the first put date is equal to the price plus interest rate. It is used for putable security. It is also similar to yield to call. The assumptions under the yield to put calculation are:
For example, assume a Rs.100 par value, 7% 5-year bond is selling for Rs.104.66 and putable at par at the end of three years. If the bond is put at the end of three years then the cash flow will be like this:
Table 1: Showing Cash Flows in Different Year
|
Year
|
Receipts
|
Total Receipts in the Year Rs.
|
|
1st year
|
Two coupons of Rs.3.50 each
|
7
|
|
2nd year
|
Two coupons of Rs.3.50 each
|
7
|
|
3rd year
|
Two coupons of Rs.3.50 each + put price 100.00
|
107
|
The present value for interest rates is shown in table 6. It is very clear from the table that 5.30% annual rate makes the present value of the cash flow equal the price of Rs.104.66. So 5.30% is the yield to put.
Table 2
|
Annual Interest Rate (%)
|
Semiannual Interest Rate (%)
|
Summated PV of 6 Cash Flow Payments of Rs.3.50 each (Rs.)
|
PV of Rs.100.00
(Rs.)
|
PV of
Cash Flow (Rs.)
|
|
4.90
|
2.45
|
19.3107
|
86.48
|
105.79
|
|
5.10
|
2.55
|
19.2462
|
85.98
|
105.22
|
|
5.20
|
2.60
|
19.2141
|
85.73
|
104.94
|
|
5.30
|
2.65
|
19.1821
|
85.48
|
104.66
|