Question

ら:CENGAGE I MINDTAP Q Search this course 。 Fahadv Assignment 07- Bonds and Their Valuation S. Bond yields a Aa upon 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 rield to masturity (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 assumptians. Which of the following is one of those assumptions? O The probability of default is zero. The bond is callable. Consider the case of BTR Co.: BTR Co. has 9% annual coupon bonds that are calable 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 cal (YTC) on BTR Co.'s bonds? Value YTC If interest rates are expected to remain constant, what is the best estimate of the remaining eleft for BTR CO.S bonds? O 8 years O 18 years 5years O 13 years If BTR Co. issued new bonds today, what coupon rate must the bonds have to be issued at par? 34.3 0 2004 -2056 Aplia. Niright reserved AM 5:00 3/27/2019

Answer 1

YTM si the rate of return expected from the bond held untill it's maturity. Means it YTM is the internal rate of return at which the present value of coupon payments to be received during life time of th bond and the face value of bond becomes equal to the issue price of bond.

The assumption is: The probability of default is 0. Because if there is a default in any coupon payment or face value repayment then in that case YTM shall not be the internal rate of return.

Calculation of YTM and YTC:(approximaiton method)

Interest=9% of 1000

=90

as we know YTM is the IRR

IRR(F1:F19) -1070.35 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 90 1090 8.2370%

Hence YTM shall be 8.2370%

for calculating YTC we shall put 1060+90=1150 at 8th year.

IRR(F1:F9) -1070.35 90 90 90 90 90 90 90 1150 8.3186%

So ytc = 8.3186%