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CFA Level I · CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds

A bond pays an annual coupon of 6% on a par value of 100 and is first callable in three years at 102. It is priced at 104.45. The yield to first call is closest to:

The yield to first call is about 5.0%. Discounting coupons of 6 for three years plus the 102 call price at 5% gives a present value of 104.45, which equals the bond price. The current yield of about 5.7% ignores the premium paid.

  1. A4.5%
  2. B5.0%Correct
  3. C5.7%

Explanation

Discount the cash flows 6, 6 and 108 (coupon plus call price) at 5%: 5.714 + 5.442 + 93.294 = 104.45. So the yield to call is 5.0%. A figure near 5.7% is the current yield (6/104.45), which ignores the call premium and the amortization of the price premium.

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