YTM 9.35/9.23/7.36/8.24 % YTC 6.91/8.24/7.83/7.36 % IF BADGRE CORP ISSUED NEW BO
ID: 2743596 • Letter: Y
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YTM 9.35/9.23/7.36/8.24 % YTC 6.91/8.24/7.83/7.36 % IF BADGRE CORP ISSUED NEW BONDS TODAY 6.91/8.24/7.36/9.35 % 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 probability of default is zero The bond is callable Consider the case of Badger Corp Badger Corp. 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 $1,160.35. 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? Value YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Badger Corp.'s bonds? 10 years 18 years O 13 years O 8 years If Badger Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par?Explanation / Answer
1) The profitability of default is zero
YTM is the return to investor in the promised way if the investor pays all the payment untill the maturity of the Bond, YTM equals the expected return rate of return under the assumption of
a. The profitability of default is zero
b. The Bond is not callable
If the Bond is callable , the YTM does not equal to expected return of return because of the the payment relating to Bond is not paid till maturity in promised way
2) YTM = 7.36%
YTM = Coupon amount + (face value - price / maturity time ) / face value + price /2
= 90 + (1000-1160.35 /18) / (1000+1160.35 /2)
= 90 + (- 8.908) / 1080.175
= (90 - 8.908) / 1080.175
= 81.092 / 1080.175
= 7.54%((Approx. 7.36%)
Note:- Coupon (interest) amount is always on face value
=9% * 1000
= $90
YTC = 6.91%
YTC = Coupon amount + (call price - current market price / calling number of years) / (call price - current market price / 2)
= 90 + (1060-1160.35/8) / (1060 + 1160.35 / 2)
= 90 + (-12.544) / 1110.175
= 90 - 12.544 / 1110.175
=77.456 / 1110.175
= 6.98% ( Approx. 6.91%)
If Interest rate are expected to remain constant , the estimate of the remaining life left for the Badger corp. Bond will be 18 years ,because in this case Badger corp. will not recall the bond during the period and the payment relating to the bond is a promised ways (No probability of default regarding the payment of Bond)
If the Badger Corp. issued news bonds today ,7.36% will be coupon rate that the bond must have if Bond is issued at par, because of the YTM of the Bond which gives the return to investor untill its maturity
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