\"The probability of default is zero\" or is it \"the bond is callable \" ??????
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Question
"The probability of default is zero" or is it "the bond is callable " ??????
courses.aplia.com IPO: Why inv... etsy ipo - Go... now worth o... 2017 etsy ce... www.mdc.ed Bonds and Their Valuation raded Assignment Read Chapter 7 | Back to Assignment Due Saturday 12.02.17 at 11:15 P Attempts: 5 5 2. Bond yields Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This Average: 5/5 AaAa percentage return is referred to as the bond's yield Yield to maturity (YTM) is the rate of return expected from a bond held until its maturity date. However, the YTM equals the expected rate return under certain assumptions, which of the following is one of those assumptions? The probability of default is zero. O The bond is callable. Consider the case of BTR Co.
Explanation / Answer
Answer: The probability of default is zero.
When the bond is callable and the company calls its bonds it means that the people who have invested in the bonds will not receive the all the returns that they were expecting to receive. Same is the case when the bond issuer defaults, all expected payments will not be received by investors. This means that the expected return and the yield to maturity will be different because bonds have been called before maturity or the bond issuer has defaulted.
Therefore, when the probability of default is zero, the investors will receive all the expected return payments.
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