A company issues a callable (at par) ten-year, 6% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $104 per $100 of face value. What is the yield to worst of this bond when it is released?

Question

Quizplus · Accepted Answer

To calculate yield to worst, we need to calculate the yield to call and yield to maturity and then take the lower of the two.

Yield to call: In one year, the bond can be called at par. Therefore, we need to calculate the yield to call, assuming the bond is redeemed at $100. The coupon payments for the first year will be $6 (6% of $100) and the redemption value will be $100. Therefore, the yield to call can be calculated as follows: 
PV = $104, FV = $100, C = $6, n = 1 
Solving for the yield, we get an answer of 1.92%.

Yield to maturity: If the bond is not called, it will mature in ten years. Therefore, we need to calculate the yield to maturity, assuming all coupon payments are received and the bond is redeemed at $100. The coupon payments for each year will be $6 (6% of $100) and the redemption value will be $100. Therefore, the yield to maturity can be calculated as follows: 
PV = $104, FV = $100, C = $6, n = 10 
Solving for the yield, we get an answer of 3.72%.

The yield to worst is the lower of the two yields, which is 1.92%. Therefore, the best choice is B.

A Company Issues a Callable (At Par) Ten-Year, 6% Coupon