Kindly explain the following text: “For a discount bond, the YTC will be higher than the YTM since the bond will appreciate more rapidly with the call to at least par and, perhaps, an even greater call price.” YTC is less then YTM only for bonds trading at a premium. WHY? I do understand that YTC has got no meaning for a bond trading at a discount… All of this sounds like greek to me. Any help is appreciated.
Suppose that you have a 10-year bond, callable after 5 years at 104, that sells at 95. To compute YTC you assume that the bond is called after 5 years at 104: you get a higher profit (104 vs. 100 for the YTM), and you get it sooner (after 5 years vs. after 10 years for the YTM). Higher profit sooner gives you a higher yield. I think that that’s what they’re trying to say (though they said it poorly).
YTC will be less than YTM for some premium bonds (not all), because you will get a loss sooner (5 years) instead of later (10 years). This is true for bonds trading at a premium higher than the call price, and even then you’ll have to do some comparing to get the exact premium where the YTC exceeds the YTM: for the YTC you get your loss sooner, but it’s a smaller loss.
No, _ this _ sounds Greek:
“Για ένα ομόλογο έκπτωση, η YTC θα είναι υψηλότερη από την YTM δεδομένου ότι το ομόλογο θα εκτιμήσουν πιο γρήγορα με την πρόσκληση για τουλάχιστον άρτιο και, ίσως, μια ακόμη μεγαλύτερη τιμή κλήσης.”
You, Sir, are a magician indeed!
Awesome. So, the issuer is obviously not going to call the issue back @104 when it is trading at 95. This explains why the YTC means zilch for a discount bond; hence,the higher yield. The loss part, I just didn’t see it coming. Thank you S2000Magician 
LOL!
I studied koine (Biblical Greek) in university.
It’s somewhat funny when canvassers from various religious groups come to the door and try to explain to me how certain passages in English translations of the Bible are very different in the “original” Greek; I’ll go to my bookshelf, pull out my Greek New Testament, and ask them to show me. Most would be lucky to find the right book, much less the correct chapter and verse.
My pleasure.
YTC doesn’t ask whether it’s _ sensible _ for the issuer to call the bond; it only asks what the yield would be should the issuer call the bond.
hence if the bond is trading at a discount it means the market interest rate is up and the callable bond value is below the par value, This is not the right time for the bond issuer to call the bond because after that they have to issue on higher interest rate.
Interest rate is inversely related with the bond price, but the callable bond has negative convexity it means the upside potential is limited to call price( this only happens when bond is trading at premium,Interest rate is down).
Thanks for this info! It helps me remember this in a better way. One question: Is it necessary for the issuer to re-issue another series of debt? S/he could have used the money for capex.
Why is the upside potential limited to call price when bond is trading at premium and Interest rate is down?
Absolutely. I have made this second nature to me now
LOL. I would never do that if I were they. They should have known that this is no ordinary magician. This is THE Magician who drives an S2000