A 10% annual coupon bond with 3 years to maturity
A 10% annual coupon bond with 3 years to maturity is currently trading at $1,010. The bond is callable in one year at a call price of $1,008 and in two years at a call price of $1,005. The bond’s yield to worst most likely occurs when the bond is:
A. held until maturity in 3 years.
B. called in year 1.
C. called in year 2.
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2024-11-17 19:14:35
Ans:A
The yield to worst for a callable bond is the lowest of the yields to call for each possible call date and the yield to maturity.
The yield to call if the bond is called in one year is 10.45%, because 1,005=(100+1,010)/1.1045
The yield to call if the bond is called in two years is 10.09% , because 1,005=100/1.1009+(100+1,008)/1.10092
The yield to maturity of the bond is 9.80%, because 1,005=100/1.0980+100/1.0980 2+(100+1,000)/1.0980 2
The yield to worst is the lowest of these and occurs when the bond is held until maturity. Therefore A is the correct answer.
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