Question

Two bonds have identical times to maturity and coupon rates. One is callable at 118, the other at 113. Which should have the higher yield to maturity

Answer 1

- Bond callable at 113

Step-by-step explanation:

The bond callable at 113 would provide a higher yield to the investors and the key reason for this is the lower price of the callable along with the other things including coupon rates and the time to maturity remaining the same. Thus, the bonds with higher price would generate lower return as the returns increase when the value of bond decreases(being closer to maturity). Therefore, the bond with 113 callable would give more returns.