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 has an early redemption feature. • The bond will not be called Consider the case of Badger Corp.: Badger Corp. has 9% annual coupon bonds that are callable and have 18 years left until matunty. The bonds have a par value of $1,000, and their current market price is $1,010,35. 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?

Answer 1

I have answered the question below

Please up vote for the same and thanks!!!

Do reach out in the comments for any queries

Answer:

Yield to Maturity is actually equlal to the expected rate of return with one assumption :

Hence, The bond will not be called.

YTM: =RATE(nper,pmt,pv,fv) =RATE(18,9%*1000,-1010.35,1000) =8.88% YTC: =RATE(8,9%*1000,-1010.35,1060) =9.35% where, nper is years to maturity pmt is annual coupon payments pv is current price of the bond fv is future value or the amount at which the bond will be redeemed 3) 18 years The bond will not be called early as yield to call is higher than the market rate. 4) 8.88% Coupon rate should equal current yield to maturity rate if the bond is to be issued at par.