11. Bond yields

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.

A bonds 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 bonds YTM requires you to make several assumptions. Which of the following is one of these assumptions?

A. The probability of default is zero.

B. The bond is callable.

Consider the following case of Blue Pencil Publishing:

Blue Pencil Publishing 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 $1160.35. However, Blue Pencil Publishing 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?

Blue Pencil Publishings bonds have a yield-to-maturity (YTM) of ______ and a yield-to-call (YTC) of ______.

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Blue Pencil Publishings bonds?

A. 5 years

B. 18 years

C. 10 years

D. 8 years

If Blue Pencil Publishing issued new bonds today, what coupon rate must the bonds have to be issued at par? _________