Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
5. Bond yields
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.
A. Which of the following is one of those assumptions?
The probability of default is zero.
The bond is callable.
B. Consider the case of Badger Corp.:
Badger 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 $1,220.35. However, Badger 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 Badger Corp.’s bonds?
|
|
Value
|
|---|---|
| YTM | |
| YTC |
C. If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Badger Corp.’s bonds?
18 years
8 years
13 years
5 years
D. If Badger Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par ?
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