Bond Yield( Choose the best answer) 1. Coupon payments are fixed, but the percen
ID: 2768063 • Letter: B
Question
Bond Yield( Choose the best answer)
1. Coupon payments are fixed, but the percentage return that investors receive varies based on the market conditions. this percentage return is referred to as bonds 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 these assumptions ?
(a)The probability of default is zero
(b)The bond is callable
2.Consider the case of Eades Corp.
Eades Corp. has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1000 and their current market price is $950.35 . However Eades Corp. may call the bonds in eight years at a call price of $1060.
What is their YTM?
(a)9.59%
(b)6.47%
(c)7.36%
(d)7.83%
What is their YTC?
(a)10.46%
(b)9.59%
(c)7.83%
(d)9.35%
3. If interest rates are expected to remain constant, what is the best estimate of the remaining life for Eades corp's bond?
(a)13 years
(b)18 years
(c)5 years
(d)8years
4. If the Eades Corp. issued new bonds today , what coupon rate must the bonds have to be issued at par?
(a)9.59%
(b)8.88%
(c)10.46%
(d)7.36%
Explanation / Answer
1. The YTM equals the Expected return when the probability of default is zero.
So the option a. is correct.
2.
Bond details Bond Par Value 1,000 Bond Market Price 950.35 Years To maturity 18 Annual Interest @9%= 90 YTM Formula= [Annual Interest+(Par Value-Market Value)/Years to Maturity]/(Par value+Market Price*2)/3 YTM =[90+(1000-950.35)/18]/(1000+950.35*2)/3 So YTM =9.59% Option is a. YTC Calculation Bond details Bond Par Value 1,000 Bond Market Price 950.35 Call Price 1,060.00 Years To Call 8 Annual Interest @9%= 90 YTC Formula= [Annual Interest+( CAll Value-Market Value)/Years to CAll]/(CAllvalue+Market Price)/2 YTC =[90+(1060-950.35)/8]/(1060+950.35)/2 YTC =10.4 % aprrox So option a is correct. 3 If interest rate remains unchanged , the bond will be unlikely be called as the coupon rate is lower than expected rate. So life of bond will be 18 years till maturity. 4 If new bonds are issued , the coupon rate will be the current YTM =9.59%