Question

In: Finance

Which would carry a higher yield to maturity: A bond with a call provision, or one...

Which would carry a higher yield to maturity: A bond with a call provision, or one without? A bond with a put provision or one without? A bond convertible into common stock, or one that is not? Besides being just a "plain vanilla" bond, what is similar about these? What is the difference?

Solutions

Expert Solution

the bond with a call provision will carry a higher YTM.

a bond without the put option will have a higher YTM.

a bond without the option to be convertible into common stock will have a higher YTM.

The call provision allows the issuer of the bonds to call the bonds before the maturity as and when the interest rates fall, this leaves the investor with reinvestment risk as they now have to invest the amount at a lower rate of interest.the issuer provides a higehr YTM to compensate for the call provision.

the put option allows the bond holder to sell the bonds at their discretion before the bonds reach the date of maturity .

a convertble bond gives the option of converting the bonds into common stock. If the prices of the stocks fall they have to suffer losses as well. in case of liquidation they will not enjoy the seniority in making payouts as against the bondholders who will be paid first in the event of liquidation.


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