Hong Life CalculatorsUnderstanding the yield to call calculator — concept and principle
Many bonds can be redeemed by the issuer before maturity at a set call price. Yield to call (YTC) is the return you would earn if you buy the bond at today's price and it is called on the first call date. This calculator also gives yield to maturity, yield to worst and current yield.
How it is calculated
- YTC is the rate i that solves: price = Σ coupon ÷ (1 + i)^k + call price ÷ (1 + i)^n, with n coupon periods until the call.
- i is per coupon period and is shown as an annual rate i × coupons per year (bond-equivalent yield).
- Yield to maturity uses the same equation with the face value at maturity.
- Yield to worst = the lower of YTC and YTM. Current yield = annual coupon ÷ price.
The principle
An issuer tends to call a bond when interest rates have fallen, so it can refinance more cheaply. That is exactly when the bond trades above par. If you buy a premium bond and it is called early, you receive the call price sooner and lose the remaining coupons, so your yield is lower than YTM. Investors therefore look at yield to worst: the most conservative yield, assuming the issuer acts in its own interest.
Worked example
Default inputs: price 1,050 USD, face 1,000 USD, coupon 6% paid twice a year, first call in 3 years at 1,020 USD, maturity in 10 years.
- Coupon per period = 1,000 × 6% ÷ 2 = 30.00 USD; coupons until the call = 6.
- Solving 1,050 = Σ 30 ÷ (1 + i)^k + 1,020 ÷ (1 + i)^6 gives i ≈ 2.41% per half-year: YTC ≈ 4.82%.
- With 20 periods and 1,000 at maturity, YTM ≈ 5.35%.
- Yield to worst = 4.82%.
- Current yield = 60 ÷ 1,050 ≈ 5.71%; gain or loss if called = 1,020 − 1,050 = −30.00 USD.
| Bond price | Yield to call (YTC) |
|---|---|
| 262 | 65.25% |
| 525 | 32.34% |
| 788 | 15.7% |
| 1,050 | 4.82% |
| 1,312 | -3.16% |
| 1,575 | -9.39% |
| 2,100 | -18.77% |
How to read the result
For a bond above par, YTC is usually the realistic figure; for a bond below par, a call is unlikely and YTM matters more. Compare yield to worst across bonds of similar credit quality. Current yield ignores the price change at redemption and should not be used alone.
Common mistakes
- Quoting YTM on a callable premium bond without checking YTC.
- Using annual periods for a semi-annual coupon.
- Forgetting that some bonds have several call dates, each with its own yield.
- Ignoring accrued interest when buying between coupon dates.
Frequently asked questions
What is the difference between yield to call and yield to maturity?
YTC assumes redemption at the call price on the call date; YTM assumes the bond runs to maturity.
When is a bond likely to be called?
When market rates fall below the coupon rate, so the issuer can refinance more cheaply.
What is yield to worst?
The lowest yield among all possible redemption dates, including calls and maturity.
Sources: Fabozzi, F. J., Bond Markets, Analysis, and Strategies (yield measures for callable bonds) · FINRA, "Callable Bonds: Be Aware That Your Issuer May Come Calling" (investor alert)