Question

Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage return is referred to as the bond's yield. Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate of return under certain assumptions. Which of the following is one of those assumptions? The bond has an early redemption feature. The bond will not be called. Consider the case of Eades Corp.: Value Eades Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $980.35. However, Eades Corp. may call the bonds in eight years at a call price of $1,060. What are the YTM and the yield to call (YTC) on Eades Corp.'s bonds? YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Eades Corp.'s bonds? O O 18 years 5 years 8 years 13 years If Eades Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par?

Answer 1

Calculation is shown below

F G 1 YTM equals expected rate of return when the bond will not be called. Using the rate function in excel we can calculate YTM and YTC 2 3 Calculation of YTM is shown below $90 4 Coupon amount (PMT) 5 No of payments (NPER) 6 Par value (FV) 7 Market price (PV) 18 $1,000 $980.35 9.23% 8 YTM 9 Calculation of YTC is shown below $90 10 Coupon amount (PMT) 11 No of payments (NPER) 12 Callable value (FV) 13 Market price (PV) 8 $1,060 $980.35 9.89% 14 YTC 15 16 If interest rate remains same then estimated life of bond would be equal to maturity period of 18 years. 17 If bonds are to be issued at par then coupon rate should be equal to YTM which in this case would be 9.23%. 18 Coupon rate should be 9.23%

Following shows working

A YTM equals expected rate of return when the bond will not be called. 1 2 Using the rate function in excel we can calculate YTM and YTC Calculation of YTM is shown below 3 =1000*9% Coupon amount (PMT) 4 5 No of payments (NPER) 18 6 Par value (FV) 7 Market price (PV) 1000 980.35 =RATE(B5,-B4,B7,-B6) 8 YTM 9 Calculation of YTC is shown below 10 Coupon amount (PMT) 1000 9% 11 No of payments (NPER) 12 Callable value (FV) 13 Market price (PV) 1060 980.35 14 YTC =RATE(B11,-B10,B13,-B12) 15 16 If interest rate remains same then estimated life of bond would be equalt 17 If bonds are to be issued at par then coupon rate should be equal to YTM w 18 Coupon rate should be 9.23%