## What is 'Yield To Call'

Yield to call is the yield of a bond or note if you were to buy and hold the security until the call date, but this yield is valid only if the security is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date and the market price. Generally speaking, bonds are callable over several years and are normally called at a slight premium.

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## BREAKING DOWN 'Yield To Call'

Many bonds are callable, especially those issued by corporations. This means that the issuer of the bond can redeem the bond on what is known as the call date, at a price known as the call price. The call date of a bond is always before the maturity date. Calculating the yield to call on a bond is important because it reveals what rate of return the investor will receive assuming that the bond is called on the earliest possible date, the bond is purchased at the current market price, and the bond is held until the call date.

## Yield-To-Call Calculation Example

The formula to calculate the yield-to-call looks slightly complicated, but it is actually quite straightforward. The components of the formula are as follows:

P = the current market price

C = the annual coupon payment

CP = the call price

t = the number of years remaining until the call date

YTC = the yield to call

The complete formula to calculate yield to call is:

P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)

Based on this formula, the yield to call cannot be solved for directly. An iterative process must be used to find the yield to call if doing the calculation by hand. But many computer software programs have a "solve for" function that will calculate the value with the click of a button.

As an example, consider a callable bond that has a face value of \$1,000 and pays a semiannual coupon of 10%. The bond is currently priced at \$1,175 and has the option to be called at \$1,100 five years from now. Note that the remaining years until maturity does not matter for this calculation.

Using the above formula, the calculation would be set up as:

\$1,175 = (\$100 / 2) x {(1- (1 + YTC / 2) ^ -2(5)) / (YTC / 2)} + (\$1,100 / (1 + YTC / 2) ^ 2(5))

Through an iterative process, it can be determined that the yield to call on this bond is 7.43%.

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