Question

3. Bond yields Aa Aa 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? O The bond has an early redemption feature. O The bond will not be called. Consider the case of RTE Inc. RTE Inc. 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, RTE Inc. 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 RTE Inc.'s bonds? Value YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for RTE Inc.'s bonds? O 18 years O 8 years O 5 years O 10 years If RTE Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par?

Answer 1

3. 1) Option b the bond will not be called

2) Coupon = 9%
Price of Bond = 1220.35
Maturity(n) = 18
Coupon(PMT) = 9%*1000 = 90

Using Financial Calculator
N = 18; PMT = 90; FV = 1000; PV = - 1220.35 CPT I/Y

YTM = 6.84%

Price to call = 1060
Maturity(n) = 10

Using Financial Calculator
N = 8; PMT = 90; FV = 1060; PV = - 1220.35 CPT I/Y

YTC = 6.51%

3) Option a 18 years

4) Coupon rate should be same as YTM when issued at par
YTM = 6.84% So Coupon rate = 6.84%

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