Yield to Call
What Is Yield to Call?
Yield to call (YTC) measures the return an investor would receive if a callable bond is redeemed by the issuer before its maturity date.
It calculates the yield based on the bond being called at the earliest possible call date.
Why It Matters
Yield to call helps investors evaluate the potential return on bonds that include a call provision. Because issuers may redeem callable bonds early when interest rates fall, investors must consider both yield to maturity and yield to call.
Understanding yield to call helps investors better assess potential income and reinvestment risk.
How Yield to Call Works
Yield to call uses similar inputs as yield to maturity but assumes the bond will be redeemed on the call date.
The calculation includes:
- purchase price
- coupon payments
- call price
- time until the call date
If interest rates fall, issuers may call bonds early and refinance at lower rates.
Example
An investor buys a callable bond that matures in 10 years but can be called in 5 years. Yield to call estimates the return assuming the bond is redeemed in year five.
Yield to Call vs Yield to Maturity
- Yield to call assumes the bond will be redeemed early.
- Yield to maturity assumes the bond is held until its final maturity date.
FAQs About Yield to Call
Why would a bond be called early?
Issuers often call bonds when interest rates decline.
Is yield to call usually lower than YTM?
Often yes, especially if the bond was purchased at a premium.
Do all bonds have yield to call?
No. Only callable bonds include this feature.
Related Terms
