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Q 1. Explain the relationship observed between ratings and yield to maturity.

Q 2. Explain why the coupon rate and the yield to maturity determine why the bonds would trade at a discount, premium, or par.

Q 3. Based on the material you learn in this Phase, what would you expect to happen to the yield to maturity and market value of the bonds if the time to maturity was increased or decreased by 5 years?

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Solution Preview

Bonds are rated on the basis of the rusk and return they are subject to in the market. Hence, A rated bonds are likely to derive high return on lowest risk as compared to the B and C rated bonds. It is also said that ratings are determinants of risk (Nathan son, 2014). And known to all is that the higher the risk, the higher the return. Yield to Maturity (YTM) is the

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