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 is callable.

The probability of default is zero.

Consider the case of BTR Co.:

BTR Co. 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 $1,070.35. However, BTR Co. 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 BTR Co.’s bonds?

	Value
YTM
YTC

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

18 years

5 years

10 years

8 years

If BTR Co. issued new bonds today, what coupon rate must the bonds have to be issued at par?   

Answer 1

1 "The probability of default is zero" 3 YTM 8.24% =RATE(18,90,-1070.35,1000) 4 YTC 8.32% =RATE(8,90,-1070.35,1060) 5 6 18 years, is remaining life of the bond. Bond will not be called. 7 8 New bond's coupon rate 8.24%

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