Yield to Call - Explained
What is Yield to Call?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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How Does Yield To Call?
The Yield to Call refers to the interest that a bond or note will pay if the investor purchases and holds the instrument until its call date. A bond has a purchase price based upon the present value of future interest payments (coupons) and return of principal at maturity. Many issuers of bonds (particularly corporations) will include the option to repurchase (or call) the bond at a date prior to the maturity date (the date when the principal is repaid). The price to call the bond is known as a call price. The Yield to Cal is calculated using the coupon rate (interest rate), the number of payment periods until the call date, and the current market price. The equation for yield to call is as follows:
P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)
Where, P = the current market price
C = the coupon payment
CP = the call price
t = the number of coupon payments remaining until the call date
YTC = the yield to call
This formula makes it very difficult to solve for YTC by hand. This process is made far easier with excel.