if YTC>YTM

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par15

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Hi all.
I have question regarding what happen if yield to call is greater than YTM.
Schweser is saying- For discount bond , YTC will be higher than YTM since the bond will appreciate more repidly with call to at least par and perhaps even greater call price.
I didn’t understand th concept here. Can someone please explain.
Thanks.
 
The interest earnings are the coupon rate. The other earnings are the capital gain - this is amortized over the life of the bond (on a discount bond where the current rate is greater than the coupon rate - you take the amount less than face and amortize it over the expected life of the loan). If the life of the bond is shortened through a call option exercised by the issuer, then the gain is accellerated (and as always, gains sooner = higher present value).
If it was a premium bond, with the premium paid is amortized over the life of the bond - a call accelerates the recognition of the premium expense and incurs a loss.
 
jcole21 Wrote:
——————————————————-
> The interest earnings are the coupon rate. The
> other earnings are the capital gain - this is
> amortized over the life of the bond (on a discount
> bond where the current rate is greater than the
> coupon rate - you take the amount less than face
> and amortize it over the expected life of the
> loan). If the life of the bond is shortened
> through a call option exercised by the issuer,
> then the gain is accellerated (and as always,
> gains sooner = higher present value).
>
> If it was a premium bond, with the premium paid is
> amortized over the life of the bond - a call
> accelerates the recognition of the premium expense
> and incurs a loss.
Very good explanation.
 
Thanks jcole21.
I have one more question regarding that
why is ytc is not quoted when YTC>YTM or when bond is at discount .(Pg 103 of Schweser notes).
 
par15 Wrote:
——————————————————-
> Thanks jcole21.
>
> I have one more question regarding that
>
> why is ytc is not quoted when YTC>YTM or when bond
> is at discount .(Pg 103 of Schweser notes).
Because the bond will never be called under those circumstances, the caller would lose money by issueing the call.
 
Thanks really great explanation. Now I am clear on this
 
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