Suppose a corporate bond that reaches maturity on 07/01/2036 is
trading today (9/29/2020) for $763. The bond certificate indicates
that the stated coupon rate for this bond is 5% and that the coupon
payments are to be made semiannually.
- Compute YTM of the bond. Clearly state your Excel / Calculator
inputs.
- Suppose the bond’s credit rating is BB. Would you use YTM as a
reasonable estimate of the investment rate of return on the bond?
Explain your answer.
- If your answer to b) is “no”, give two alternative estimates of
the investment return on the bond. Assume that the risk free-rate
is 2.5% and market expected rate of return is 8%. (in your
estimates use recession values)