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CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields

A 10-year bond with a 7% annual coupon is callable once, in three years, at par. It is currently priced at 104. The yield measure most likely to be the yield to worst is the:

The yield to worst is most likely the yield to the first call date. Because the bond trades at a premium to its par call price, early redemption forces the premium to be lost over fewer years, producing a lower yield than yield to maturity.

  1. Acurrent yield
  2. Byield to maturity
  3. Cyield to the first call dateCorrect

Explanation

For a bond priced above its call price, redemption at the call date means the premium is amortized over a shorter period, which gives a lower yield than yield to maturity. Yield to worst is the lowest of the possible yields, so it is the yield to call. Current yield ignores the premium amortization and is not a worst-case redemption measure.

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