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

A three-year bond with a 5% annual coupon and par value of 100 is priced at 102. It is callable in one year at 101 and in two years at 100.5. Its yield to maturity is about 4.27% and its yield to the second call date is about 4.17%. The yield to worst is closest to:

The yield to worst is about 3.9%. Calling after one year returns 106 on a price of 102, a yield of 3.92%, which is below the yield to the second call date of about 4.17% and the yield to maturity of about 4.27%. The lowest of these is the yield to worst.

  1. A3.9%Correct
  2. B4.2%
  3. C4.3%

Explanation

Yield to the first call: the cash flow at year 1 is 5 + 101 = 106, so the yield is 106/102 - 1 = 3.92%. This is lower than the second-call yield (about 4.17%) and the yield to maturity (about 4.27%). The yield to worst is the minimum, about 3.9%.

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