What is Yield to Call?
A yield to call is the calculation of the total yield that will result from investment of a bond, assuming the bond is held until the call date. There is also an assumption that the call price will remain constant and not be impacted by some irregular set of factors during the life of the bond. Investors will often make use of calculating the yield to call as part of the evaluations into whether or not to invest in the bond issue.
The formula for calculating a yield to call is very straightforward. Essentially, it involves dividing the total annual income of the callable bond by the current principal amount and market price. From this figure, the difference between the purchase price and the call price is subtracted. In the event that the purchase price is lower than the call price, then the time value of the difference will also be accounted for in the calculation. The final answer will be in the form of a percentage, and serve as an indicator of the amount of return that the investor can reasonably anticipate.
In many ways, a yield to call is very similar to calculating a yield to maturity. However, there is one critical difference to keep in mind. The yield to call anticipates a shorter life for the bonds under consideration, since the call date may or may not be the same as the maturity date. A yield to maturity assumes there will not be an early call for the bond, and that it will remain in effect until full maturity is reached.
It is not unusual for investors to project both a yield to call and a yield to maturity as part of the process of considering a given investment. When it comes to investing in bonds, it is actually a very sound practice to look at projected return given the two different sets of circumstances. If the investor finds that the return in both scenarios is within acceptable perimeters, then he or she can feel free to proceed with the bond purchase.
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