Yield to Call Calculator

By Oghenekaro Elem
Last updated: Jul 28, 2021

Yield to call calculator is a tool for investors to estimate the return on investment on a callable bond should the asset get called before its maturity. Investing in fixed-income assets is a sure way to lock in returns and avoid the volatility of market interest rates. But many long-term bonds with high-yielding coupon rates are callable and present a risk that you may never get the maximum return from your investment.

Moreover, if you buy these callable bonds from the secondary market at a higher market rate than their face value, you may even lose money when it gets called. This article will help you understand how to calculate the yield to call, prepare for the possibility of a call from a bond issuer, and protect your portfolio.

Also, consider checking out the fixed deposit calculator to learn about a fixed deposit account that offers a fixed return with no call risk on your savings.

What is yield to call?

Yield to call (YTC) determines the return on investment a bondholder gets until the bond's call date.

You're lending money to the bond issuer at a fixed interest rate for several years when you invest in a bond. So, as long as you have the bond, you're a bondholder, and you will continue to earn annual interests or bond yield, paid by the issuer, which can be a corporation such as a bank, private company, or the government.

That means if you invest $1,000 in a bond with an interest of 10% per annum (each year) for 15 years, you will earn $1000 * 10% = $100 every year of the bond 15-year term. When the bond matures, the issuer repays the loan they borrowed from you, the original $1,000 invested as principal, while you're earned $100 * 15 = $1500 through the years for holding the bond.

If you ever decide that you don't want to hold the bond anymore, you can always sell it at the current market price to interested investors. However, if other comparable investments offer less interest rate than you're earning from the bond, you're less likely to sell it, which means the bond's market price will be higher than the price the bond was issued (i.e., the bond's face value).

Bond issuers don't have the same flexibility when the market interest rate fluctuates; they must continue making the agreed coupon payment to investors. Therefore, some bonds include a call option feature that gives bond issuers the right to refund or buy back their issued bonds at a call price lower than the market price before the bond matures.

In addition, some callable bonds come with a predetermined date, called call protection, after which the issuer can redeem the bond; others are freely callable by the issuer at any time. The bond call feature protects the issuer when the market interest rate drops and provides them the opportunity to refinance their loans at a lower market interest rate or reissue the bond at a lower coupon rate to reduce cost.

Using our earlier example; Assuming a bond issuer decides to use their call option for a bond, it means that you will not be able to earn your expected $1,500!

The yield to call calculator helps you determine how much you can earn if you invested in a callable bond, and the bond issuer calls the bond before its maturity date. Since this call feature poses an investment or call risk to investors who otherwise prefer to hold their high-yielding bond until it matures, callable bonds tend to offer higher coupon rates than noncallable bonds to attract investors.

How to calculate yield to call on a bond? — Yield to call formula

The formula for the yield to call calculation is given as:

YTC = (i + ((Pc - Pm) / n)) / ((Pc + Pm) / 2) * 100

where:

  • YTC — Yield to call;
  • i — Annual interest;
  • Pc — Call price;
  • Pm — Current market price; and
  • n — Number of years until call.

Example:

Let's use the yield calculation formula to find the yield to call value of a bond with an annual interest of $21 and a call price of $150,000 in 7 years that is currently selling at a market price of $32,000.

YTC = ($21 + (($150,000 - $32,000 ) / 7 )) / (($150,000 + $32,000) / 2) * 100

YTC = 18.547%

The YTC value indicates that the investor will make a return equivalent to 18.547% on investment by holding the bond until it's called.

FAQ

How do you calculate yield to call on a bond?

You can calculate YTC using the formula:

YTC = (annual interest + ((call price - market price) / number of years until call)) / ((call price + market price) / 2) * 100

How to use the yield to call financial calculator to prepare for a bond call?

Using the YTC calculator for your financial planning is easy. Just input the annual interest from the bond, the bond call price, the current market price, and the number of years until the bond call to get the approximate yield to call.

Can you lose money on a bond?

Yes. If you buy a bond from the secondary market at a price higher than the bond's face value, and it gets called, the bond issuer may pay a year's annual interest as compensation, but it may not cover the cost of your investment.

What is the difference between yield to call and yield to worst?

Yield to call (YTC) is the amount an investor could earn if a bond is called, while yield to worst (YTW) is the lowest amount an investor could earn if a bond is purchased at its current price and held until it is called or matures. For bonds with one call date, YTW is the lower of YTC or the yield to maturity (YTM). For bonds with multiple call dates, YTW is the lowest of the YTC for each call date and the YTM.

How to prepare for a bond call?

If you purchase a callable bond, you're ultimately exposed to a bond call, disrupting your investment return. To prepare for a bond call:

  1. Ensure you buy a callable bond with a higher interest rate than a noncallable bond. That's the only way the investment is worth it. Otherwise, buy a noncallable bond.
  2. Ascertain the call feature has a call protection for investors. The call protection ensures that the bond is not called by the issuer until after a few years when you've earned some returns.
  3. If the bond has multiple call dates, use the yield calculation formula to find the Yield at each call date, particularly the first call date. Knowing these yields will give you a better understanding to be able to estimate the best- and worst-case scenarios by comparing the ROI for each yield to call with the yield to maturity (YTM) return.
  4. With the information obtained using the yield to call financial calculator, you can decide if the bond is worth holding, or you should sell it:
    • If the YTC is greater than YTM, it may be better to sell the bond at that point before it presents a call risk; but
    • If the YTC is less than YTM, it is in your interest as an investor to hold the bond until it matures or gets redeemed by the issuer. But keep in mind that as the call protection period closes in and the market interest rate declines, the bond's market price may begin to decline as well, which means you may miss out on selling at a premium.
Oghenekaro Elem
Annual interest
$
Call price
$
Market price
$
Number of years until call
yrs
Yield to call
%
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