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Zorluk: Çok zorDebt Securities and Bond Structure

An investor purchases an 8%8\% corporate bond maturing in 2020 years that is callable in 55 years at $1,040\$1,040. The bond is currently trading in the secondary market at $1,120\$1,120. Which of the following statements correctly ranks the four yield measures for this bond from highest to lowest and identifies the most relevant yield calculation for the investor?

  1. Nominal Yield > Current Yield > Yield to Maturity > Yield to Call; Yield to Call is the most relevant metric as it represents the yield-to-worst.Cevap
  2. B
    Yield to Call > Yield to Maturity > Current Yield > Nominal Yield; Yield to Call is the most relevant metric because the $40\$40 call premium increases the investor's total return.
  3. C
    Nominal Yield > Current Yield > Yield to Call > Yield to Maturity; Yield to Maturity is the most relevant metric because holding the bond to full maturity maximizes cumulative interest payments.
  4. D
    Current Yield > Nominal Yield > Yield to Maturity > Yield to Call; Current Yield is the most relevant metric because it measures annual cash income relative to purchase price.

Cevap

The yield hierarchy from highest to lowest for a bond trading at a premium is Nominal Yield > Current Yield > Yield to Maturity > Yield to Call. Yield to Call is the most relevant metric because securities industry rules mandate quoting the yield-to-worst on callable premium bonds.
For any bond purchased at a premium (above par value), the yield relationship follows the strict sequence: Nominal Yield > Current Yield > Yield to Maturity > Yield to Call. Because the investor pays $1,120\$1,120 for a $1,000\$1,000 par value bond, the annual return is reduced by the loss of principal at redemption. When callable, early redemption in 55 years forces the investor to write off the $120\$120 premium faster than if held for 2020 years, making Yield to Call the lowest yield. FINRA and MSRB rules require broker-dealers to quote the lower of YTM or YTC (Yield-to-Worst), which for premium bonds is always Yield to Call.

Adım Adım Çözüm

1
Determine the bond's market status relative to par value
The bond's market price ($1,120\$1,120) is higher than par value ($1,000\$1,000), establishing that the bond trades at a premium.
Yield relationships depend directly on whether a bond is trading at a discount, at par, or at a premium.
2
Apply the yield hierarchy for premium bonds
Nominal Yield (8.00%8.00\%) > Current Yield ($80/$1,120=7.14%\$80 / \$1,120 = 7.14\%) > Yield to Maturity < Yield to Call.
Paying a premium dilutes overall returns. Amortizing the $120\$120 premium over 2020 years reduces YTM below Current Yield. Amortizing that same premium over a shorter 55-year call schedule reduces YTC even further.
3
Identify the yield-to-worst disclosure standard for callable premium bonds
Yield to Call is the lowest of all yield measures for this bond and constitutes the yield-to-worst.
When an issuer calls a premium bond early, the investor loses the unamortized premium faster. Broker-dealers must quote the lower, most conservative yield (YTC) to investors.

Anahtar Kavram

Bond Yield Hierarchy and Yield-to-Worst (YTW) for Callable Premium Bonds
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Konular

Debt Securities and Bond Structure

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