Yield-to-Maturity and Credit Rating Relationship in Corporate Securities

PART-1
The table is as per the question provided (Morningstar, 2018a, 2018b, 2018c)
Bond
Company/
Rating
Face Value
(FV)
Coupon
Rate
Annual
Payment
(PMT)
Time-to
Maturity
(NPER)
Yield-to-Ma-
turity
(RATE)
Market Value
(Quote)
Premium
Discount
A-
Rated
Oracle $1,000 4.20% 41 18.5 Yrs 4.45% 1180 Premium
B-
Rated
Verizon
Communi-
cation
$1,000 4.32% 38.72 19.8 Yrs 5.02% 1018 Discount
C-
Rated
KLA Ten-
cor
$1,000 6.05% 65.2 17.9 Yrs 6.01% 921 Premium
Yield to maturity and credit rating are inversely related to each other in nature.This is in turn
very important as because corporate securities which have a low credit rating are also continu-
ously under exposure towards default, and subsequently, there exists risk on the higher side for
the financial specialists. Hence, there will be a definite expectations of the financial investors to
expect the yield on these securities on to be on the higher side which might have foreseen as

fixed expense to the additional risk which is already on the assumption list of the specialists in fi-
nance (Damodaran, 2018).
The rate of the coupon along with the YTM, characterizes if at all the security lies with the op-
tion for trade at higher cost than average, inflated, or deflated rate. Eventually, when the corre-
lation between YTM and the coupon rate is considered, then the securities will in general be
traded at par also keeping in mind that the rate of coupon offered is equivalent to the speculators’
expectations of the yield. Suppose if YTM is below the rate of the coupon rate, then at that point
undertaken security might be traded in the cost, higher than the assumptions as because the se-
curity which offers the coupon is highly required taking into account the reasonable outcome
from the underlying security. This makes it more noteworthy to earn interest in the market in
terms of these securities. Vice-versa, when the maturity yield (YTM) is higher than the yield on
the bond, then at that point, underlying coupon is expected to be traded at a discount. The coupon
rate of the bond is less than the financial investors expectations. (Kane and Marcus, 2013).
Downfalling maturity period will result in a general decline of the YTM and accordingly also
build the estimated costs of the bond. Although the postponing of the maturity date to a later date
will, in general, lead to an increment in the YTM and in this manner a reduction in the costs of
the bond can be seen. (Parrino and Kidwell, 2011).

PART- II
CAPM Approach
The table below shows CAPM approach with 5 year Risk and Return (Yahoo Finance, 2018).
Company 5-year Risk-Free
Rate of Return
Beta (β) 5-Year Return
on Top 500
Stock
Required Rate of
Return (CAPM)
Intel 2.13% 1.20 9.25% 10.67% pa
Dell 2.13% 1.16 9.25% 10.39% pa
Microsoft 2.13% 0.82 9.25% 7.97% pa
The yield on the US treasury is the Risk-free rate, being the 5 – year bond which is calculated as
2.13% per annum. (Brealey, Myers & Allen, 2018) We have used the CAPM model for the cal-
culation of beta of different stocks.
Required rate of return Risk free rate + Beta*(Market return – Risk free rate)
Intel 2.13 + 1.20*(9.25-2.13) 10.67% pa