Question

Suppose on 09/18/2020 you observe the following quote for corporate bonds of Home Depot. Assume that the bonds make semi-annual payments.

1. Find YTM for the bonds. Use Excel, state your result and Excel function inputs

Issue                             Price       Coupon(%) Maturity

Home Depot Inc        93.51      5.875              16-Dec-36

2. What can be said about expected rate of investment return on the Home Depot bonds if they are AA-rated?
3. What would be your answer to question b) if you learn that the rating of the bonds is BBB?

Answer 1

a]

YTM is calculated using YIELD function in Excel :

settlement = date today

maturity = date of maturity

rate = coupon rate

pr = price of bond (per $100 of par value)

redemption = redemption price of bond (per $100 of par value). This is $100, as the bond is redeemable at par.

frequency = number of coupon payments per year. This is 2, as it is a semiannual coupon bond.

YIELD is calculated to be 6.53%.

b]

The expected rate of return seems very high because the yield of 6.53% is relatively high for a AA rated bond

c]

If the rating of the bonds is BBB, the yield seems fair relative to the yields for similar BBB rated bonds.