Yield To Call. MarketCheese

Yield to call (YTC) is a meaning that refers to the bondholder’s return which is received if the asset is kept by its call date — some specific time before the maturity of that debt instrument. This rate can be measured arithmetically as the compound interest rate at which the present value of the bond's anticipated coupon payments and the call price are equal to the bond's current price in the market.

Yield to call is applied to debt instruments that allow investors to redeem the bonds on the call date at the call price, which are called callable bonds. In this case, the date of the bond's call precedes its maturity date.

As a rule, calls of the bond are carried out within a few years. Most often, bonds are called at a small premium, which is higher than their face value, despite the fact that the exact call price is built on prevalent market rates.

Yield To Call explained

Municipal and corporate bonds are often callable, which means that the entity issuing the debt obligation, a corporation or municipality, can obtain new funding at a lower price after paying off its debt if rates decline.

Figuring the yield to call on these bonds is essential since it demonstrates an expected investor’s rate of return, under three following conditions:

bonds are called on the earliest possible date;
bond are bought at the current price in the market;
bonds are held until the call date.

The yield to call is the most exact estimate of a bond's expected rate of return compared to the yield to maturity.

How to calculate Yield to Call

Superficially, the yield to call formula may seem rather complicated, but it is not. To figure out yield to call, the following formula is applied:

Nevertheless, the yield to call cannot be directly determined by applying this formula. To find the yield to call manually, an investor should use an iterative procedure. Nowadays, this process is simplified, as many computer programs are provided with a "solve for" function, with which such values can be calculated with a single keystroke.

Example of Yield to Call

For example, the face value of some callable debt instrument is $1,000 and its six-monthly coupon is 10%. Its current price is $1,175, and it can be called at the price of $1,100 5 years from current moment.

It should be noted that the remaining years to maturity do not play a role in this calculation. With the formula above, the calculation would look like this:

Using an iterative procedure, it can be identified that the yield to call on this bond equals 7.43%.