7.4 YTC vs. YTM Relationship (Summary)

Below, we shall assume that there is no call penalty, i.e., the bond will be called at Par.

Par Bond

YTC = YTM

Discount Bond

YTC > YTM

• This is because the discount to face value is received sooner.
• If there is a call penalty, the YTC will be even higher.
• It is senseless for an issuer to call away a bond at Par when it could purchase it in the open market at a discount to Par!

Premium Bond

YTC < YTM

• In a sense, the premium is “lost” sooner.
• If there is a call penalty, the relationship will depend on how large the premium and call penalty are in relation to one another.
• If the call price exceeds the market price, the issuer will NOT call the bond; it can buy the bond more cheaply in the open market.