Question

A company issues a callable (at par) five-year, 7% coupon bond with annual coupon payments. The bond can be called at par in one year after release or any time after that on a coupon payment date. On release, it has a price of $110 per $100 of face value. What is the yield to worst of this bond in percentage when it is released

Answer 1

the worse case scenario is that the bond yields -2.73%

Step-by-step explanation:

the worst case scenario is that the bonds are called one year after they are issued.

you invest $110 today

in one year, you will receive $100 + $7 = $107

your holding period return = ($107 - $110) / $110 = -0.02727 ≈ -2.73%

generally callable bonds are sold at lower prices than regular bonds, so a situation like this is very unlikely since the issue price should probably be lower.