medium · Debt Capital Markets bond-instruments-structures
A portfolio manager requires YTW for a bond trading at 103.50. The bond is callable at 101.00 in 1 year or 100.00 in 2 years.
Why is the 1-year call likely to be the YTW?
- YTW always defaults to the very first available call date for premium bonds.
- The 101.00 first call price sits above the later 100.00 call price on the schedule.
- The 2-year call permits several additional coupon payments that help offset the price premium.
- The capital loss of 2.50 points must be amortized over a very short 1-year period.
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