For a bond issued at a discount, which yield is typically the highest?

• A. YTC
• B. YTM
• C. Current Yield
• D. Coupon Rate

Answer: (A)

A bond issued at a discount yields the highest return under the yield-to-call scenario because the combination of a below-par price and an early call can produce a larger rate of return over a shorter period. When a bond is priced below its par value, you gain not only from the periodic coupon payments but also from the eventual move toward par value at maturity. If the bond is callable, the issuer may exercise the call option before maturity, paying the call price (often near or at par) and ending the investment early. The yield to call assumes you’re holding until that call date, so the cash flows (coupon payments plus the call price) occur sooner. This shorter horizon, coupled with the near-par call price, often results in a higher internal rate of return than holding the bond to maturity, making the yield to call the highest among the options. The current yield (coupon divided by price) tends to be lower because it ignores any capital gain at maturity, and the coupon rate is fixed and based on par, not the discounted market price.