SIE practice questionhardYield to call
A callable bond purchased at a premium is called at the first opportunity. What effect does this have on the investor’s return?
- AInvestor receives the full coupon payments to maturity
- BThe yield to call is higher than the yield to maturity
- CThe yield to call is lower than the yield to maturity✓ Correct answer
- DInvestor avoids any loss of premium
Explanation
Why C — The yield to call is lower than the yield to maturity
Early redemption accelerates premium loss, reducing yield to call below YTM. Early redemption means fewer coupon payments, and the investor loses a portion of the premium.
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