So I have been given this problem in class, and although I have no issues doing the binomial model on options, I cannot seem to get my head around the problem when its calculating ytm on just a stock.
Assume a binomial model for two periods (t= 0,1,2) in which the equity hodlers hold 20% of the company and debt holders hold 80%. The company value is $1.000. The UP branch increases value by 20% and DOWN branch decreases value by 30%. Risk free rate for any period is 10%.
Prove that YTM at t=0 equals 15,21% annually.
Thanks in advance guys!