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Subject 2. Other Yield Measures, Conventions, and Accounting for Embedded Options PDF Download

Street convention yields assume that payments are made on scheduled dates, excluding weekends and holidays. The true yield is calculated using a calendar including weekends and holidays. The government equivalent yield is based on actual/actual day count.

The current yield relates the annual dollar coupon interest to the market price. For example, the current yield for a 5%, two-year bond with a price of $978 is 5.11% (($1000 x 5%) / $978)). This is the simplest of all yield measures, and fails to recognize any capital gain or loss, reinvestment income or accrued interest.

The simple yield is similar to the current yield but includes the straight-line amortization of the discount or premium.

The standard YTM measure assumes that the bond will be held to maturity. It is not an appropriate yield measure for callable bonds, because they may be retired before maturity. For callable bonds a yield to first call, which assumes that the bond will be called on the first call date, is computed.

Callable bonds typically have multiple call dates, each with its own call price. The yield to worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting. It illustrates the worst possible yield an investor may realize. The option-adjusted-yield is the yield-to-maturity after adding the theoretical value of the call option to the price.

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