Question

Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This percentage returned is referred to as a yield.

1. A bond’s yield to maturity (YTM) is the percentage return that it is expected to generate if the bond is assumed to be held until it matures. Calculating a bond’s YTM requires you to make several assumptions. Which of the following is one of these assumptions?

The bond has an early redemption feature.

The bond will not be called.

Consider the following case of Blue Moose Home Builders Inc.:

Blue Moose Home Builders 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 $1100.35. However, Blue Moose Home Builders Inc. may call the bonds in eight years at a call price of $1,060.

What are the YTM and yield to call (YTC) on bonds:

2. Blue Moose Home Builders Inc.’s bonds have a yield-to-maturity (YTM) of _______ and a yield-to-call (YTC) of ________ .

3. If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Blue Moose Home Builders Inc.’s bonds?

5 years

8 years

10 years

13 years

4. If Blue Moose Home Builders Inc. issued new bonds today, what coupon rate must the bonds have to be issued at par? ________

Answer 1

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