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.

A bond’s yield to maturity (YTM) refers to the rate of return expected from a bond held until its maturity date. However, the YTM equals an investor’s expected rate of return under certain assumptions. Which of the following is one of those assumptions?

_____The bond will not be called.

_____The bond has an early redemption feature.

Consider the case of Magic Milling Company:

Magic Milling Company 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 $1,160.35. However, Magic Milling 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 Magic Milling’s bonds?

Value

YTM ____(6.84%, 7.83%,7.36%, or 6.05% )

YTC_____(6.91%, 6.05%, 8.24%, or 6.84%)

The current yield on the bond is ______. (0.62%, 15.52%, 7.76%, or 11.64%)

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Magic Milling’s bonds?

____18 years

____8 years

____10 years

____5 years

If Magic Milling Company issued new bonds today, what coupon rate must the bonds have to be issued at par?

___7.36%

___8.24%

___6.05%

___6.84%