4. Bond yields

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

a) The bond is callable.

b) The probability of default is zero.

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 $980.35. 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?

a) 8 years

b) 5 years

c) 18 years

d) 13 years

If Badger Corp. issued new bonds today, what coupon rate must the bonds have to be issued at par?

a) 8.55%

b) 7.93%

c) 9.23%

d) 7.36%