if YTC>YTM

CFA Level I
#1

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.

#2

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.

#3

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.

#4

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).

#5

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.

#6

Thanks really great explanation. Now I am clear on this