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5. Bond yields Coupon payments are fixed, but the percentage return that investors receive varies based...

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. Which of the following is one of those assumptions?

The bond will not be called.

The bond has an early redemption feature.

Consider the case of Demed Inc.:

Demed 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 $1,040.35. However, Demed 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 Demed 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 Demed Inc.’s bonds?

18 years

8 years

13 years

5 years

If Demed Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par?   

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