In an earlier worksheet we discussed the difference between

In an earlier worksheet, we discussed the difference between yield to maturity and yield to call. There is another yield that is commonly quoted, the yield to worst. The yield to worst is the lowest potential yield that an be received on a bond without the issuer actually defaulting. Yield to worst is calculated on all possible all dates. It is assumed that prepayment occurs if the bond has a call provision. The yield to worst will be the lowest of yield to maturity or yield to call. The yield to worst may be the same as yield to maturity but ever higher. Of course, with a traditional callable bond that has a call premium, the call premium can decline over time. A company has the following bond outstanding. The bond is callable every year on May 1, the anniversary date of the bond. The bond has a deferred call with three years left. The call premium on the first call date s one year\'s interest. The call premium will decline by 10 percent of the original call premium for 10 years Eleven years from today, the call premium will be zero. Given the following information, what is the yield to worst for this bond? Current date: Maturity date: Price (percent of par): Coupon rate: Par value (percent of par): Coupons per year: 5/1/2016 5/1/2036 104.5% 10.00% 100% 2 Call date 5/1/2019 5/1/2020 5/1/2021 5/1/2022 5/1/2023 5/1/2024 5/1/2025 5/1/2026 5/1/2027 5/1/2028 Call premlum $100 90 80 70 60 50 40 30 20 10

Solution

Let us Assume

Face Value is $1000

Market price/ price paid = $1000*104.5%

=$1045

Interest / coupon rate = 10% ; Annual interest = 1000*10%=$ 100

i) Current Interest rate :

Current Interest rate= Annual interest/Market Price *100

=100/1045*100

=9.569%

ii) Yield Price

Yield Price = (Face value - Market Price)/Face Value *100

=($1000-$1045)/$1000 *100

= - 4.5%

Yield to Worst for the above bond is 9.28% at Call date 01-05-2028 as per below details.

a;	b;	c = 9.569*b;	d=-4.5%;	e(given);	f = c+d+e;	g = f/b;
Call date	Period from bond issue date to call date(years)	Total Interest % upto Call date	Yield price	Call premium	Total Inflow to investor upto call date	Annual interest
01-05-2019	3	28.71%	-4.5%	10%	34.21%	11.40%
01-05-2020	4	38.28%	-4.5%	9%	42.78%	10.69%
01-05-2021	5	47.85%	-4.5%	8%	51.35%	10.27%
01-05-2022	6	57.41%	-4.5%	7%	59.91%	9.99%
01-05-2023	7	66.98%	-4.5%	6%	68.48%	9.78%
01-05-2024	8	76.55%	-4.5%	5%	77.05%	9.63%
01-05-2025	9	86.12%	-4.5%	4%	85.62%	9.51%
01-05-2026	10	95.69%	-4.5%	3%	94.19%	9.42%
01-05-2027	11	105.26%	-4.5%	2%	102.76%	9.34%
01-05-2028	12	114.83%	-4.5%	1%	111.33%	9.28%
01-05-2033	17	162.67%	-4.5%	0%	158.17%	9.30%
01-05-2036	20	191.38%	-4.5%	0%	186.88%	9.34%