Question

A bond with 6 years remaining until maturity is currently trading for 102 per 100 of par value. The bond offers an 8% coupon rate with interest paid semiannually. The bond is first callable in 2 years, and is callable after that date on coupon dates according to the following schedule.

End of Year

4

5

6

Call price

103

102

100

A. What is the bonds YTM?

B. The bond's annual yield-to-first call is closest to?

C. What is the bond's yield to second call?

D. What is the bond's yield to worst?

Answer 1

A. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate.

The YTM of a discount bond that does not pay a coupon is a good starting place in order to understand some of the more complex issues with coupon bonds. The formula to calculate YTM of a discount bond is as follows:

YTM=(Face Value/Current Price)1/n​​−1

(100/102)1/12 -1Answer

(b)