What Is Yield To Call?

Yield to call (YTC) is the return that a bondholder will be paid if the bond is held until the call date, which will occur sometime before the bond reaches maturity.🦹

Yield to call applies to callable bonds, a type of bond that allows the investor to redeem the bond or the bond issuer to repurchase it on the call date, at a price known as the call price. By definition, the call date of a bond occurs before the 澳洲幸运5官方开奖结果体彩网:maturity date.

This number can be mathematically calculated as the compound interest rate at which the present value of a bond's future coupon payments and call price is equal to the current market price of the bond.

Generally speaking, bonds are callable over several years. They are normally called at a slight premium above their face value, though the exact 澳洲幸运5官方开奖结果体彩网:call price is based on prevailing market rates.

Understanding Yield To Call

Many bonds are callable, including municipal bonds and bonds issued by corporations. If interest rates fall, the company or municipality that issued the bond might opt to pay off the outstanding debt and get new financing at a lower cost.

Calculating the yield to call on such bonds is important because it reveals the rate of return the investor wiꦺll receive, ass꧅uming:

1. The bond is called on the earliest possible date
2. The bond is purchased at the current market price
3. The bond is held until the call date

Calculating Yield To Call

Although the ꦍformula used to calculate the yield to call is quite straightforward.

🤪The complete formula to calculate yield to call is:

P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)

澳洲幸运5官方开奖结果体彩网: Where:

澳洲幸运5官方开奖结果体彩网: P = the current market price

C = the annual coupon payment

CP = the call price

t = the number of years remaining until the call date

YTC = the yield to call

Based on this formula, the yield to call cannot be solved directly. An iterative process must be used to find the yield to call if the calculation is being done by hand. Fortunately, many software programs have a "solve for" function that's capable of calculating such values with a click of the mouse.

Yield To Call Example

As an example, consider a callable bond that has a 澳洲幸运5官方开奖结果体彩网:face value of $1,000 and pays a semiannual coupon of 10%. The bond is currently priced at $1,175 and has the option to be called at $1,100 five years from now. Note that the remaining years until maturity d𝐆oes not matter for this calculation.

Using the above formula, the calculation would be set up🌟 as:

$1,175 = ($100 / 2) x {(1- (1 + YTC / 2) ^ -2(5)) / (YTC / 2)} + ($1,100 / (1 + YTC / 2) ^ 2(5))

Through an iterative process, it can be determined that the yield to call oꦿn t🍰his bond is 7.43%.

The Bottom Line

If you 🀅invest in callable bonds, you need to know its yield to maturity, but it is perhaps more important to know its yield to call. Yield to call is the return you will get if the issuer decides to essentially cancel the issue and p✃ay off investors early.

If you want real assurance that you'll get the yield to maturity that you expect, consider investing in non-callable bonds. They pay a bit less than callable bonds but you'll be certain to get the income you expect from them.