The following information relates to Questions
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}
\text { End of Year } & \text { Call Price } \
\hline 3 & 102 \
4 & 101 \
5 & 100 \
\hline
\end{array}$

-The bond's yield-to-worst is closest to:
A) 2.88%.
B) 5.77%.
C) 6.25%.

Question

The following information relates to Questions 
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}
\text { End of Year } & \text { Call Price } \
\hline 3 & 102 \
4 & 101 \
5 & 100 \
\hline
\end{array}$

-The bond's yield-to-worst is closest to:
A) 2.88%.
B) 5.77%.
C) 6.25%.

Quizplus · Accepted Answer

The yield-to-worst (YTW) is the lowest potential yield that can be received on a bond without the issuer actually defaulting. The YTW is calculated by considering the worst-case scenario for the investor, which would be the bond being called at the earliest call date if this results in a lower yield than holding the bond to maturity. In this case, the earliest call date is at the end of year 3 with a call price of 102. Since this call option could potentially offer a lower yield than holding the bond to its maturity (due to the bond being callable at a price above its current trading price and par value), the YTW would be calculated based on the bond being called at the end of year 3. Given the choices provided and the nature of the bond's structure, the correct answer reflects the yield calculated under this scenario, which is lower than the bond's yield to maturity or its current yield.

The Following Information Relates to Questions a Bond with 5

The Following Information Relates to Questions
a Bond with 5