Glossary term
Yield to Call
Yield to call is the annualized yield on a callable bond assuming the issuer redeems it on a specified call date at the stated call price.
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What Is Yield to Call?
Yield to call is the annualized yield on a callable bond assuming the issuer redeems the bond on a specified call date at the stated call price. It is calculated like yield to maturity, but the final cash flow is the call price on the call date rather than the face value at final maturity.
YTC matters because callable bonds do not always remain outstanding until maturity. If market rates fall, an issuer may call a higher-coupon bond and refinance at a lower cost. The investor gets principal back earlier than expected and may lose future coupon income.
Key Takeaways
- Yield to call estimates return if a callable bond is redeemed on a call date.
- It uses the call price and time to call instead of final maturity value and maturity date.
- YTC is especially important for premium bonds with high coupons.
- A bond can have multiple yields to call if it has multiple possible call dates.
- Yield to worst compares yield to call scenarios with yield to maturity and uses the lowest relevant yield.
Call-Date Formula
A simplified annual yield-to-call relationship is:
Here, C is the coupon payment per period, y is the yield per period, and n is the number of periods until the call date being analyzed.
For example, suppose a premium bond trades at $1,080, pays a 6% coupon, and can be called in two years at $1,020. The yield to call may be much lower than the coupon because the investor pays a premium today but may receive only the call price if the issuer redeems the bond early.
How Investors Use It
Yield to call helps investors avoid being seduced by a high coupon. A callable bond may look attractive if the coupon is well above current market rates, but that same fact can make it more likely to be called. The investor may not actually receive those high coupons for the full stated maturity.
For callable bonds, investors typically look at yield to maturity, yield to each call date, and yield to worst. The most relevant number depends on the bond's price, coupon, call schedule, market rates, credit quality, and issuer incentives.
Call Risk and Reinvestment Risk
Call risk is usually worst when rates fall. The issuer benefits by refinancing; the investor loses a high-coupon bond and must reinvest at lower yields. That asymmetry is why callable bonds often offer higher stated yields than otherwise similar noncallable bonds.
YTC is still only an estimate. The issuer may choose not to call the bond. Market rates may move differently than expected. The call provision may include notice periods, make-whole terms, sinking funds, or extraordinary redemption clauses that change the analysis.
The Bottom Line
Yield to call estimates the return on a callable bond if the issuer redeems it on a specified call date. It is essential for callable-bond analysis because the maturity date may not be the date that determines the investor's actual return.