A company issues a callable (at par) 20-year, 5% 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 $102 per $100 of face value. What is the yield to worst of this bond when it is released?

Question

Quizplus · Accepted Answer

A) Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 1;
computing interest = 2.94%
Using a financial calculator, PV = -102, FV = 100, PMT = 5, N = 20;
computing interest = 4.84%
2.94% is worse than 4.84%; hence, 2.94% is the yield to worst.

A Company Issues a Callable (At Par) 20-Year, 5% Coupon