Question

Coupon payments are fixed, but the percentage return that investors receive varies based on market conditions. This 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 of return under certain assumptions. Which of the following is one of those assumptions?

a. The bond will not be called.
b. The bond has an early redemption feature.

Answer 1

Answer:

Option A -  The bond will not be called is the correct answer.

Explanation:

The rate of return expected from a bond held until its maturity date is referred to as its Yield to maturity (YTM)

However, if YTM is equivalent to the return on the bond, then the assumptions are that bond will not be called, and the will not be defaulted by the user at maturity.

Thus the likelihood of the default is zero.

Therefore, option A - The bond will not be called is the correct answer.