why does the expected return of a corporate bond not equal its yield to matirity?
Homework Answers
The corporate bonds pay a fixed amount of money to its investors so it is considered as secure income investment. The expected return of a corporate bond is the firm's debt cost of capital. It is equal to the risk-free rate of interest plus risk premium. The expected return of a corporate bond is not equal to its yield to maturity and it is generally less than the bond's yield to maturity because the yield to maturity of a bond is calculated using the promised cash flows (coupon payments). It is not calculated based on the actual or expected cash flows which could be different from the promised cash flows.
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