How do I calculate yield to call on a callable bond?

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AcadiFi · Accepted Answer

Yield to call (YTC) is the IRR assuming the bond is called on the first call date at the call price. It uses the same PV equation as YTM but substitutes call date for maturity and call price for face value: P = Σ [C / (1 + y/m)^t] + CP / (1 + y/m)^(n_call×m), where n_call = years to call, CP = call price. Example: Ambrose Capital 8.0% semi-annual bond, $1,000 par, 10 years to maturity, callable in 3 years at $1,040. Current price = $1,078. YTM to 10-year maturity: solves roughly to 7.03%. YTC to 3-year call: $1,078 = Σ [$40 / (1 + y/2)^t] + $1,040 / (1 + y/2)^6 for t = 1..6. Try y = 6.80%: PV = $40 × (annuity 6 periods at 3.40%) + $1,040/(1.034)^6 = $40 × 5.360 + $1,040 × 0.8177 = $214.40 + $850.41 = $1,064.81 — too low. Try y = 6.50%: PV ≈ $1,080.12 — slightly too high. Interpolate y ≈ 6.53%. YTC (6.53%) is lower than YTM (7.03%), so the conservative yield-to-worst = 6.53%. When bonds trade at a premium, YTC is usually lower than YTM because calls truncate premium amortization; when at a discount, YTM is usually lower because calls realize gain sooner. For multiple call dates, compute YTC for each and take the lowest.

How do I calculate yield to call on a callable bond?

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