Yield to Call: Definition, Calculation, and Why It Matters

What is yield to call (YTC)?

Yield to call is the return an investor receives if a callable bond is held only until its earliest call date and the issuer redeems it at the specified call price. Callable bonds give the issuer the right to repurchase the bond before maturity, typically at a preset call price (often a small premium above face value). YTC expresses that expected return as an annualized interest rate.

Why YTC matters

• YTC often gives a more realistic estimate of expected return than yield to maturity (YTM) for callable bonds, because issuers commonly call bonds when it’s advantageous for them (for example, when interest rates fall).
• Investors in callable bonds face call risk: the bond may be redeemed early, which affects total return and reinvestment opportunities.
• Issuers pay higher coupons on callable bonds to compensate investors for call risk.

When the issuer is likely to call

• Issuers are more likely to call a bond when market interest rates decline, allowing them to refinance at lower rates.
• Issuers are unlikely to call when interest rates rise.

Formula and computation

The yield to call equates the bond’s current price to the present value of its coupon payments until the call date plus the present value of the call price:

P = (C / 2) × { [1 − (1 + YTC / 2)^(-2t)] / (YTC / 2) } + CP / (1 + YTC / 2)^(2t)

Where:
– P = current market price
– C = annual coupon payment (dollars)
– CP = call price (dollars)
– t = years until the call date
– YTC = yield to call (annual nominal rate, compounded semiannually)

Notes:
– The formula shown assumes semiannual coupon payments. Adjust the formula if coupons are paid annually or at a different frequency.
– YTC cannot be isolated algebraically from this equation; it is solved iteratively (trial-and-error) or by using a financial calculator, spreadsheet function (e.g., Excel’s RATE or YIELD), or bond-pricing software.

Example

A callable bond has:
– Face value: $1,000
– Annual coupon: 10% ($100), paid semiannually
– Current price: $1,175
– Call price: $1,100
– Call date: 5 years from now

Set up:
$1,175 = ($100 / 2) × { [1 − (1 + YTC / 2)^(-10)] / (YTC / 2) } + $1,100 / (1 + YTC / 2)^10

Solving iteratively (or with a financial calculator) gives YTC ≈ 7.43% (annual nominal rate, compounded semiannually).

Practical implications for investors

• If you want certainty of income to maturity, choose non-callable bonds; they typically pay slightly lower coupons because the issuer lacks the option to redeem early.
• For callable bonds, compare YTC (assuming the bond is called on its earliest date) with YTM and current yield to understand possible outcomes.
• Consider reinvestment risk: if a bond is called when rates have fallen, you may have to reinvest principal at a lower rate.

Key takeaways

• Yield to call measures the expected annualized return if a callable bond is redeemed on its call date at the call price.
• YTC is often a more relevant metric than YTM for callable bonds, because issuers commonly call bonds when it benefits them.
• Compute YTC with iterative methods or financial tools; the formula assumes a specific coupon schedule and must be adjusted accordingly.
• To avoid call risk and reinvestment uncertainty, consider non-callable bonds, which generally offer more predictable returns.