8. 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.

A bonds yield to maturity (YTM) refers to the rate of return expected from a bond held until its maturity date. However, the YTM equals an investors expected rate of return under certain assumptions. Which of the following is one of those assumptions?

A. The bond has an early redemption feature.

B. The bond will not be called.

Consider the case of Magic Milling Company:

Magic Milling Company 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 $1,070.35. However, Magic Milling 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 Magic Millings bonds?

YTM = ________ (8.24%, 9.35%, 7.36%, or 7.09%)

YTC = ________ (7.36%, 8.32%, 8.24%, or 7.64%)

The current yield on the bond is ________ (16.82%, 0.67%, 12.62%, or 8.41%)

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

A. 13 years

B.18 years

C. 5 years

D. 10 years

If Magic Milling Company issued new bonds today, what coupon rate must the bonds have to be issued at par?

A. 7.36%

B. 8.24%

C. 7.64%

D. 8.32%