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# Yield to Call

Many bonds, especially those issued by corporations, are callable. This means that the issuer of the bond can redeem the bond prior to maturity by paying the call price, which is greater than the face value of the bond, to the bondholder. Often, callable bonds cannot be called until 5 or 10 years after they were issued. When this is the case, the bonds are said to be call protected. The date when the bonds can be called is refered to as the call date.

The yield to call is the rate of return that an investor would earn if he bought a callable bond at its current market price and held it until the call date given that the bond was called on the call date. It represents the discount rate which equates the discounted value of a bond's future cash flows to its current market price given that the bond is called on the call date. This is illustrated by the following equation:

where

• B0 = the bond price,
• C = the annual coupon payment,
• CP = the call price,
• YTC = the yield to call on the bond, and
• CD = the number of years remaining until the call date.

Like the yield to maturity, the yield to call usually cannot be solved for directly. It generally must be determined using trial and error or an iterative technique. Fortunately, financial calculators make the task of solving for the yield to maturity quite simple.

 Yield to Call Example Find the yield to call on a semiannual coupon bond with a face value of \$1000, a 10% coupon rate, 15 years remaining until maturity given that the bond price is \$1175 and it can be called 5 years from now at a call price of \$1100. Solution:

 Example Problems Find the yield to call for the semiannual coupon bond with the following features. Bond Price: \$ Face Value: \$ Coupon Rate: % Years to Maturity: Call Price: \$ Years until Call Date: Yield to Call: %

© 2002 - 2010 by Mark A. Lane, Ph.D.