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?
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?
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!
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…
Do you have the question code?
Here’s a similar question I found: Achievable…
Thanks for pointing this out. I just updated the question to be more consistent with the concept.