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    YTM and bond rating

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    Land O'Toys issued a 6.5% coupon bond, which pays interest semi-annually. The bond will mature in 10 years and is currently priced at $1,037.19. The average yields to maturity for 10-year corporate bonds are reported in the following table by bond rating:

    Bond Rating Yield % Bond Rating Yield %
    AAA 5.4 BB 7.3
    AA 5.7 B 8.2
    A 6.0 CCC 9.2
    BBB 6.5 C 12.0
    D 14.5

    Question: Compute the yield of maturity of the bonds before the purchase announcement and use it to determine the likely current bond rating. Compare to the YTM table in the attachment.

    ** See ATTACHED file(s) for more information **

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    Solution Preview

    The YTM is the discounting rate that will make the present value of interest and principal equal to the price today. The semi annual interest is 1,000 X6.5%/2 = ...

    Solution Summary

    The solution explains how to compute Yield of Maturity and determine the likely current bond rating