Aa Aa 8. Bond yields Coupon payments are fixed, but the percentage return that i

Question

Aa Aa 8. Bond yields Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. Thi 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. O The bond is callable Consider the case of Swing Co. Swing Co. 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 $1,010.35. However, Swing Co. 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 Swing Co.'s bonds? Value YTM YTC If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Swing Co.'s bonds? O 10 years O 18 years O 13 years O 5 years If Swing Co. issued new bonds today, what coupon rate must the bonds have to be issued at par?

Explanation / Answer

Answer: The probability of default is zero.

When the bond is callable and the company calls its bonds it means that the people who have invested in the bonds will not receive the all the returns that they were expecting to receive. Same is the case when the bond issuer defaults, all expected payments will not be received by investors. This means that the expected return and the yield to maturity will be different because bonds have been called before maturity or the bond issuer has defaulted.

Therefore, when the probability of default is zero, the investors will receive all the expected return payments.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.