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

The yield to worst is the lowest possible yield an investor can receive if the issuer chooses to exercise its option to call the bond.

In this case, the bond can be called one year after release or any time after that on a coupon payment date, which means that the yield to worst occurs if the bond is called one year after release.

Using a financial calculator, we can solve for the yield to worst as follows:

N = 9 (since the bond can be called in year 1)
PV = -104
PMT = 6
FV = 100
CPT -> I/Y = 1.92%

Therefore, the yield to worst of this bond is 1.92%, which corresponds to choice (B).

A Company Issues a Callable (At Par)ten-Year,6% Coupon Bond with Annual