**CFA Level 1 - Fixed Income Investments**

The limitations of the yield to maturity measure are that it assumes that thecoupon rate will be reinvested at an interest rate equal to the YTM. Besides that it does take into considerationthe coupon income and capital gains orloss as well as the timing of the cash flows.

**3.**

**Yield to First Call**

Yield to first call is computed for a callable bond that is not currently callable. The actual calculation is the same as the Yield to Maturity with the only difference being that instead of using a par value and the stated maturity, the analyst will use the call price and the first call date in calculating the yield.

**4.**

**Yield to First Par Call**

Again, yield to first par call is the same procedure as above, with the difference being that the maturity date that will be used instead of the stated maturity date is the first time the issuer can call the bonds at par value.

**5.**

**Yield to Refunding**

Yield to refunding is used when the bonds are currently callable but there are certain restrictions on the source of funds used to buy back the debt when a call is exercised. The refunding date is the first date the bond can be called using a lower-cost debt. The calculation is the same as YTM.

**6.**

**Yield to Put**

Yield to put is the yield to the first put date. It is calculated the same way as YTM but instead of the stated maturity of the bond, one uses the first put date.

**7.**

**Yield to Worst**

Yield to worst is the yield occurs when one calculates every possible call and put date that has the lowest possible yield. For example if you calculate all the call dates and the yield comes out as follows 5.6%, 7.6%, 8.2% and 7.5%, the yield to worst would be 5.6%. This measure means little to the potential return; it is supposed to measures the worst possible return the investor will receive if the bond is called or put.

**8.**

**Cash Flow Yield**

Cash flow yield deals with mortgage-backed and asset-backed securities. The cash flows of these securities are interest and principal payments. What makes this complicated is that the borrowers who make up the mortgage or asset pool can prepay their loans in whole or in part prior to the scheduled principal payment. Because of this, the cash flows have to be estimated and an assumption must be made as to when these principle prepayments may occur. The rate that exists when the prepayments occurs is called the prepayment rate or prepayment speed.Once this rate is estimated, a yield can be calculated. The yield is the interest rate that will make the present value of the estimated cash flows equal the price plus accrued interest.

**Example: Cash Flow Yield**

Because cash flows for these securities are usually monthly, a bond-equivalent yield must be developed. The math here is a little different than in the above examples:

__Step 1__- the effective semi-annual yield must be computed from the monthly yield by compounding it for six months.

Effective semi-annual yield = (1 + monthly yield) to the 6

^{th}power -1

__Step 2__- Double the effective semi-annual yield to get the annual cash flow on a bond equivalent basis.

Cash flow yield = 2 * {(1 + monthly yield) to the sixth power-1}

**Answer:**

So if the monthly yield is .8% then:

Cash flow yield = 2*{ 1.008) to the sixth power -1}

= 2*.04897

= 9.79%

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