A company issues a callable (at par)five-year,7% 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 $110 per $100 of face value.What is the yield to worst of this bond when it is released?

Question

Quizplus · Accepted Answer

Yield to worst is the lowest possible yield that can be earned on a bond based on the worst case scenario, which in this case is the bond being called at par in one year. Using a financial calculator or Excel, we can solve for the yield to worst as follows:
N = 4 (since the bond will be called after the 1st year)
PMT = 7
PV = -110
FV = 100
CPT -> I/Y = 2.73%
Therefore, the answer is B.

A Company Issues a Callable (At Par)five-Year,7% Coupon Bond with Annual