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?

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The yield to worst (YTW) for a callable bond is the lowest possible yield an investor can expect. Since the bond can be called at par in one year and is currently priced above par ($110 for $100 of face value), the worst-case scenario for an investor is if the bond is called at the first opportunity. To calculate the YTW, we consider the bond being called at the end of the first year. The investor receives $107 ($100 face value + $7 coupon), having paid $110. The yield is thus calculated as (($107 - $110) / $110) * 100 = -2.73%. Since yields are typically expressed as positive figures, the YTW is 2.73%.

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