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How to Calculate Yield to Call (YTC): Definition, Formula & Example

Lesson Transcript
Instructor: Bryant Trombly

Bryant has taught graduate finance and has an MBA and master's degree in information technology.

In this lesson, you will learn about the structure of bonds, how to compare annualized total returns, and calculate the yield to call for bonds that have a call date feature. Updated: 02/24/2021

What Are Bonds?

Susan has been researching different types of investments and decides she will buy some bonds. Bonds are debt securities where an investor lends an initial amount of money, called the principal or par value, to a corporation for a set amount of years. Over those years the investor receives annual coupon payments, which are payments based on the interest rate of the bond. At the end of the set amount of years the investor gets the principal amount back.

Some of the bonds are listed for sale at a premium, which is a bond price that's higher than the par value. Some are listed for sale at a discount, which is a bond price that is lower than the par value. No matter what the bond price is when Susan buys it, if she holds the bond until it matures, she will receive the par value.

Susan understands that the return she gets on the bond will be partly from all of the coupon payments she receives over time and also any difference she receives between what she bought the bond for and what she gets back for par value when it matures.

One way she can find the return she would get on different bonds is from looking at the yield to maturity, which is a calculation of the total return of a bond based off of what price it was purchased at, what the par value is, and how much will be received in coupon payments before it matures.

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  • 0:04 What Are Bonds?
  • 1:22 Call Dates
  • 1:56 Yield to Call
  • 3:16 Lesson Summary
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Call Dates

While Susan notices that all bonds have those characteristics in common, there are other features that some bonds have and others don't. One feature she noticed often is a call date. A call date is a specific point in time before a bond's maturity that the bond issuer can pay back investors early. This means that Susan would not get all of the coupon payments that she would have if the bond wasn't paid back until its maturity.

This makes it hard to compare bonds with call dates to those without them, so Susan can't rely on using yield to maturity like other bonds.

Yield to Call

Luckily for Susan, there's another way she can compare bonds with call dates. The yield to call (YTC) is a calculation of the total return of a bond based off of the purchase price, the par value, and how much will be received in coupon payments until the call date.

Susan can calculate the YTC using the following equation,

YTC = (C + (CP - P) / t) / ((CP + P) / 2)

where:

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