Date | Type | Yield | Call/Put Price | Trade Price |
---|---|---|---|---|
1/1/09 | Put | 7.000% | 79.6000 | 80.00000 |
1/1/10 | Put | 7.100% | 79.3373 | 80.00000 |
1/1/11 | Call | 6.500% | 77.4406 | 80.00000 |
1/1/12 | Call | 6.400% | 76.1274 | 80.00000 |
1/1/13 | Put | 8.000% | 82.3466 | 80.00000 |
1/1/14 | Put | 8.500% | 85.9432 | 80.00000 |
1/1/15 | Call | 8.250% | 85.3948 | 80.00000 |
1/1/20 | Maturity | 8.759% | 100.00000 | 80.00000 |
To determine the yield based on the sample schedule, the following steps occur:
Start by calculating the yield to maturity at 1/1/20. If no puts or calls are done, this gives you a yield of 8.759%.
At 1/1/15, the issuer knows that the call at a price of 85.9432 and yield of 8.250% is a better deal for the issuer than waiting for the maturity at a price of 100 and yield of 8.759%.
At 1/1/14, you know that if you wait until the 1/1/15 call, the issuer will call the security then. You see that you can put the holding at price 85.9432 and yield 8.50% which is better, so you would do it.
At 1/1/13, you see that you can put the security giving a yield of 8.0%. You will do better by waiting until 1/1/14.
At 1/1/12, the issuer sees that the issuer can call at a yield of 6.40%, clearly better than waiting for you to put on 1/1/14.
At 1/1/11, the issuer sees that the issuer can call at a yield of 6.5%. This is worse for the issuer than waiting until 1/1/12 so the issuer plans to wait.
At 1/1/10, you see that you can put at yield 7.10% which saves you from having to take the 1/1/12 call at yield 6.40%
At 1/1/09, you see that you can put at yield 7.0% but know that you will do better by waiting until 1/1/10.
The yield determined by this process is 7.1%.
So, following this method, you know you will never do worse than the call or put yield finally selected, unless you choose to, regardless of what the issuer chooses to do.
Notice that if there are no puts, this method produces the yield to worst call and that if there are no calls, this method produces the yield to best put.
Example 2
- Yield to Best Call with Suspense
A fund elects to amortize premium with the Yield to Best Call with Suspense option selected for the amortization rule's Recognize Call Date and Prices field. The Fund purchases a security at a price of 102. The security has the following call schedule and resulting yield.
Call Date | Call Price | Yield |
---|---|---|
01/15/2013 | 106.28 | 14.17225 |
01/15/2014 | 104.19 | 9.397558 |
01/15/2015 | 102.09 | 8.2333804 |
01/15/2016 | 100 | 7.735527 |
01/15/2017 (Maturity Date) | 100 | 7.85198 |
The Final results, all the calls above the purchase price of 102 are ignored as amortizing to those call dates and prices would cause Eagle Accounting to go away from Par. Eagle Accounting calculates the best yield based upon the remaining calls. In this scenario, the best yield to call is 7.85198 (maturity date). Eagle Accounting begins amortizing on 01/15/2015, as this is the last call date above the purchase price. Eagle Accounting Date amortizes from 102 down to 100 using a Yield of 7.85198.
Example 3
- Yield to Best Call with Suspense
A fund has elected to amortize to Yield to Best Call with Suspense option selected. Fund purchase a security at a price of 90. The security in question has the following call schedule and resulting yield.
Call Date | Call Price | Yield |
---|---|---|
01/15/2014 | 104.19 | 18.260327 |
01/15/2015 | 102.09 | 11.196092 |
01/15/2016 | 100 | 8.674696 |
01/15/2017 (Maturity Date) | 100 | 7.857649 |
Results. Eagle Accounting amortizes to 01/15/2016 Call Date, as this gives the highest yield. Eagle Accounting amortizes to 01/15/2016 at a price of 100. Eagle Accounting begins to amortize on Settlement Date to 01/15/2016 as the target date.