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Essentials Of Investments
Found in: Page 329
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Two bonds have identical times to maturity and coupon rates. One is callable at 105, the other at 110. Which should have the higher yield to maturity? Why?

The YTM on the bond with lower callable i.e. 105 will be higher in comparison to the other bond.

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Step by Step Solution

Definition

The issuer of the callable bond can redeem the bond before the date of maturity.

Explanation on the higher yield

As the call provision is more valuable to the firm, the bond callable at 105 should sell at a lower price. Therefore, its yield to maturity will be higher.

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