Yield to call

[vitamin]

Bond is my enemy... I am confused with this:

"For bonds trading at a premium to par, the yield to call may be less than the yield to maturity." Is it simply because yield for bonds traded at premium is less than yield to maturity?

and i don't get this either:

"If the bond were trading at a discount to par value, there would be no reason to calculate the yield to call. For a discount bond, the yield to call will be higher than the yield to maturity since the bond will appreciate more rapidly with the call to at least par, or an even greater call price"

thank you so much!

 

[CFAHouston]

Bonds trading at premium does have lower YTC than YTM. The reason is because your coupon rate is higher than MR. Preimum bond is more likely to get called earlier if interet rate drops. (so YTM when bond don't get called will be higher)

And yes, having a discount bond, there is not reason for calculate YTC since the coupon rate is already less than MR.

 

[jamespucyk]

Think about it like this the yield calculations encompass 3 things:
A) The coupon payment
B) The reinvestment income of the coupons
and C) any capital gain or lost.

Without going into A & B, any premium bond is bought for a higher price and therefore you lose on the face value of the bond. Put another way the capital loss is is actually reflected in the yield calculation. Buying a discount bond is like buying a stock that you then sell at a higher price; the yield calculation reflects this point by showing a higher yield than a bond bought at a higher price.

 

[vitamin]

thx~~