medium · Debt Capital Markets bond-instruments-structures

What happens to the YTW of a callable bond if the issuer's credit spread narrows significantly while benchmark rates remain unchanged?

1. The YTW immediately converges to and becomes equal to the bond's stated coupon rate.
2. The YTW increases because the issuer is now a materially higher-quality credit.
3. The YTW becomes irrelevant since the bond is now absolutely certain to be called early.
4. The bond price rises, likely causing the YTW to fall as it anchors to a call date.

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