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.
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
...Yield to maturity is average rate of return on bond if it is held to its maturity date and if all cash flows are reinvested at the same rate of interest. ...
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... When yield to maturity is less than the coupon rate, the bond sells for more than the par value ( $1000) and the current yield is less than the coupon rate...
...YTM =. ... (Hint: Conduct a sensitivity analysis of price to changes in the yield to maturity, which is also the going market interest rate for the bond. ...
...yield to maturity? What is the effective annual yield? We will find YTM through trial and error method We find YTM= 10.00% Check: Price of bond Coupon rate= 8.0 ...
... the price next year using YTM= 10.37 ... payments Discount rate annually= 10.37% (Yield to maturity) Maturity value ... Calculation of bond price: Interest payment per ...
