yield to call

Example

“The callable bond's 3% yield to maturity was misleading — the yield to call of 2.1% better reflected likely returns if rates fell.”

Memory Tip

YIELD TO CALL = return if bond is called early. More relevant than YTM for premium callable bonds.

Why It Matters

Yield to call helps investors understand the actual return they might receive if a bond issuer decides to redeem the bond early, which is especially important when interest rates fall and issuers are more likely to call bonds. This metric protects investors from over-estimating their returns since a called bond typically means losing out on the higher interest payments they expected to receive until maturity.

Common Misconception

Many investors assume that yield to maturity is the return they will definitely receive, but with callable bonds the issuer can redeem early at their advantage, meaning the actual yield to call could be significantly lower. People often overlook this risk when comparing callable bonds to regular bonds with similar advertised yields.

In Practice

Suppose you purchase a callable bond with a 5 percent coupon, a maturity date of 20 years, and a call date of 5 years at par value. If interest rates drop to 2 percent, the issuer will likely call the bond after 5 years, giving you a yield to call of 3.5 percent instead of the 5 percent yield to maturity you were expecting, resulting in you losing out on 10 years of higher interest payments.

Etymology

YIELD (return) TO (until) CALL (early redemption). The YIELD assuming the bond is CALLED (redeemed early).

Common Misspellings

Related Terms

More in investing

Other investing terms you should know