Final answer:
The nominal yield to maturity (YTM) and nominal yield to call (YTC) are measures of return on a bond based on various factors including coupon rate and market price. An investor will generally earn the YTM if the bond is held until maturity, but could earn the YTC if the bond is called early.
Step-by-step explanation:
The bond's nominal yield to maturity (YTM) and nominal yield to call (YTC) are calculated based on the bond's coupon rate, market price, face value, and time to maturity or call date, respectively. To ascertain these yields, cash flows from the bond—including interest payments and the return of principal—must be discounted back to the present value at a rate that equalizes the bond's current price. The YTM represents the annualized return an investor will receive if they hold the bond until maturity, assuming all payments are made as scheduled. The YTC is similar but assumes the bond will be called at the earliest call date.
An investor would generally expect to earn the YTM if the bond is held to maturity. However, if the bond has a call feature, and market conditions make it advantageous for the issuer to call back the bond before its maturity date (typically to refinance at a lower interest rate), the investor might instead earn the YTC. The decision on whether an investor is more likely to earn the YTM or YTC depends on interest rate movements and the specific terms of the bond's call feature.