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Bonds: Yield To Maturity (YTM) and Yield To Call (YTC)

Describe the differences between the yield to maturity (YTM) and the yield to call (YTC) on a bond.
Why would the return to the investor be different if a bond is called? Why?
What are bond ratings and how do they affect the ability of the firm to raise funds?
Are these ratings similar to the ratings for a country or a company?
What are the differences between common stock and preferred stock?

Solution Preview

Describe the differences between the yield to maturity (YTM) and the yield to call (YTC) on a bond.

The YTM is the rate of return that would be received if the bond is held by the investor until its maturity date. It is the maximum amount that is expected to be received upon maturity. The YTC is the rate of return that will be received at the call date. Note that the call date is before the maturity date. The YTC involves bonds that are callable, or bonds that are called before their maturity. This can happen for a variety of reasons. The YTC is what will be received by the investor when the bond is called (if it is, most bonds aren't called unless it specifically is a callable bond). The YTM is the expected return on the actual maturity date of a bond that has not been called.

Why would the return to ...

Solution Summary

This solution discusses yield to maturity, yield to call, and other bond related concepts.

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