Suppose a corporate bond that reaches maturity on 09/01/2040 is trading today (9/29/2020) for $803. The bond certificate indicates that the stated coupon rate for this bond is 6% and that the coupon payments are to be made semiannually.
Maturity date | 9/1/2040 |
Todays date | 9/29/2020 |
Current price | 803 |
Coupon rate | 6% |
YTM | 0.03557418 |
Formula Used:-
Yield to Maturity=YIELD(B40,B39,B42,B41,1000,2)*2
B. No, major disadvantage of YTM is that it does not consider the risk of Investment that is the major factor that affect the required rate of return, if the bond is more risky then Investors must get higher return. That means the return on any Investment must consider the risk involved in that security
C.
As Bond is BB rated let's assume it's beta = 1.25
Expected return = Rf + beta*(Rm+Rf)
=2.5% + 1.25*(8%-2.5%)
= 2.5%+ 6.875%
= 9.375%
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