Fixed Income

tirtha
Posts: 2
Joined: Sat Apr 30, 2016 9:56 am

Fixed Income

Postby tirtha » Thu Aug 04, 2016 4:55 pm

Three bonds are identical in credit quality and all other respects except the following:

Bond X: Noncallable, accelerated sinking fund.
Bond Y: Callable, accelerated sinking fund.
Bond Z: Noncallable, no sinking fund.
The correct order for these three bonds, from highest yield to lowest yield, is:

1)Bond Y; Bond Z; Bond X.
2)Bond Y; Bond X; Bond Z.
3)Bond X; Bond Z; Bond Y.


Please explain your reasoning

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Fixed Income

Postby edupristine » Fri Aug 05, 2016 5:01 am

Hi Tirtha

Bond Z has no provisions for early retirement (which are unfavorable for the bondholder, other things equal), so it should yield the lowest. Bond X is noncallable, but allows the issuer to redeem principal through an accelerated sinking fund. Bond Y has an accelerated sinking fund and is callable, giving the issuer the most flexibility, and therefore requiring the highest yield.


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