Why don’t we consider the call premium when calculating YTC? If the bond has a call premium and is trading at par, wouldn’t you yield more (averaged annually) if the bond is called than if it’s held to maturity?
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Actually, the formula given for YTC does contain the call price so I guess my question is why is the bond see-saw flat even if there’s a call premium?
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The bond see-saw requires a general assumption that callable bonds will be called at par. Most bonds that are called do not involve a call premium (are called at par), so it’s not a bad assumption.
The fact that you noticed this tells me you understand the underlying concept of yields vs. price. Great job!
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Thanks. That makes sense but I ran into a quiz question about a bond selling at par callable at 103 and the correct answer was that all the yields are the same…
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Do you have the question code?
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Thanks for pointing this out. I just updated the question to be more consistent with the concept.
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