Bond Help
Hi all,
Just trying to deepen my understanding of bonds. So I know YTW is the lower of YTC and YTM, correct? YTM is higher than YTC in some cases and lower in the other cases. I don't quite understand which case is which but here is my logic:
-
YTM is lower than YTC if the bond trades at a premium because the issuer would want to call back the bond, they're basically paying $1,000 for a bond that costs more than $1,000.
-
YTC is lower than YTM if the bond trades at a discount because the issuer wouldn't want to call back the bond, since they'll be paying $1000 for a bond that worth less than that.
Is the above correct? and, if so, how does this change if the bonds aren't callable? Additionally, how does current yield fit into all of this, is it always between YTM and YTC? Or is there some other way to think of this?
sorry, i'm just lost here and I never understood bonds in econ class that well
bump
It's the opposite of what you are thinking. If bonds are trading at a discount that means interest rates have risen. For this reason the issuer is less likely to call a bond because they would have to re issue at a higher interest rate. Given that callable bonds typically have a call feature in place where they have to pay a premium (x amount over par), the YTC would be higher than YTM in a discount scenario. The opposite is true for a premium scenario since the issuer is more likely to call the bond and the bond holder would theoretically only be able to reinvest at a lower rate. Additionally in a premium scenario if a bond were to be called, all future coupon payments would cease and therefore add to the reasoning for YTC
Accusamus distinctio sit laboriosam repellat dicta. Possimus quia amet adipisci dicta magnam. Voluptates eveniet beatae laborum vitae et quaerat necessitatibus. Praesentium iure qui molestiae perspiciatis praesentium ea. Nulla tempore dolores blanditiis voluptatum rerum. Sint vel tempora ut eum architecto ea quo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...