Question-66: How does multiple call dates affect the Yield to call and Yield to maturity considered by a fixed income investor?

Answer: A callable bond can be called any time after the first call date. Hence, investor has to calculate the yield-to-call for each coupon date till the maturity. And he should consider which is the lowest among all to get the idea of yield (internal rate of return). The lowest yield-to-call among all calculated is known as yield-to-worst. And any conservative trader should use this one to consider the possible yield he can get by investing in that bond.

Question-67: Suppose you have a callable bond with 5-year maturity can be called at the end of 3 years. How does yield-to-maturity is affected in this scenario?

Answer: Suppose an investor want to hold this bond for 5 years then he is expecting some YTM (Yield to maturity) let’s say Y%. However, issuer call this bond at the end of 3 years. Then actual return an investor get at the end of 5 year depend on following

• The coupon he received every six month (or coupon anniversary) he had re-invested it or not. If re-invested then at what rate?
• Once the bond is called by the issuer at the end of 3 year. He must re-invest the cashflow received for next year to realize the return. However, this again depend that whether he can get the same rate or not, while re-investing the received cashflow.

You can see on both the above scenario we see re-investment risk. Because there is no guarantee that investor can re-invest the same amount again on the rate on which he is expected YTM or Yield to call return.

Question-68: By what other name “Yield” is referred in fixed income world?

Answer: Other name for the “Yield” is “Internal Rate of Return”. It is not the same as coupon. However, value of Yield is depending on the coupon, and Yield can be less, equal or more then coupon and depends on various factors.

Question-69: Is “Yield” for a portfolio is weighted average of the Yield-to-maturity?

Answer: No, you can’t calculate Yield for entire portfolio by simply taking average or weighted average of the yield-to-maturity of the individual bonds. To compute that you have to find the cashflow for each individual bond in the portfolio and then determine the interest rate which make the all future cashflows on the portfolio make is equal to the market value (based on current price of the bond) of entire portfolio. And again, this is also affected same as calculation affected for individual bond. Like having interest rate risk and re-investment risk.

Question-70: Can you calculate the YTM (Yield to maturity) for floating rate bond?

Answer: Floating rate bond generally have their coupon associated with some reference rates like LIBOR. And as you know the LIBOR or any reference rates are not constant, they are keep changing. And determining future cashflow is not possible. Hence, we can not calculate the Yield to maturity for Floating Rate bonds.