Yield to Call
Yield to call (YTC) is the total annualized return an investor would earn if a callable bond is purchased at its current price and redeemed by the issuer on its earliest possible call date at the specified call price, accounting for coupon income, the difference between purchase price and call price, and the shortened holding period.
Many corporate bonds, municipal bonds, and agency securities carry call provisions that grant the issuer the right — but not the obligation — to redeem the bonds before their stated maturity date at a predetermined price, typically at par or a small premium to par known as the call premium. For such bonds, the stated maturity date does not define the investor's actual holding period: if interest rates decline significantly after issuance, the issuer will likely call the bonds to refinance at lower rates, returning principal to investors early and at potentially less attractive terms.
Yield to call is computed using the same present value logic as yield to maturity, but substituting the call date for the maturity date and the call price for the face value in the calculation. If a bond is currently priced at $1,020, pays a 6% annual coupon semi-annually, has a call date in three years, and carries a call price of $1,010, the YTC is the discount rate that equates the present value of six coupon payments plus the $1,010 call price receipt to the $1,020 current price. That YTC will differ — sometimes significantly — from the YTM calculated assuming the bond runs to its stated 10- or 20-year maturity.
YTC is most relevant for bonds trading at or above the call price (at a premium to par), because these are the bonds most likely to be called. When rates decline and a bond trades to a significant premium, the issuer has strong incentive to refinance, making the call date rather than the maturity date the more probable termination point for the investor. Conversely, bonds trading well below the call price are unlikely to be called and their YTM better approximates the realistic holding period return.
The concept of call risk — the risk that the issuer will call the bond precisely when interest rates are low and reinvestment options are unattractive — is central to callable bond analysis. A callable bond purchased at a premium when rates have fallen sharply combines both reinvestment risk (receiving principal back at a low-rate environment) and call-driven price compression (the bond cannot appreciate much above the call price because the issuer can redeem it at that level). This dynamic, sometimes called negative convexity, is why callable bonds carry higher spreads than non-callable comparables with equivalent credit quality.
For municipal bonds — which are very commonly callable at par after 10 years — investors should always compute both YTM and YTC when evaluating a purchase. Brokerages and MSRB (Municipal Securities Rulemaking Board) rules require disclosure of yield to worst, defined as the lower of YTM and YTC, to ensure retail investors understand the minimum return they can expect if the issuer exercises its call option at the most disadvantageous time.