Yield to call (YTC) is a measure of the return on a bond if it is held until its call date, which is the date when the issuer can redeem the bond before its maturity date. YTC considers the bond's current price, its face value, the time until the call date, and the bond's coupon payments.
What is the primary purpose of calculating yield to call for a callable bond?
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Select an option above to see an explanation here.
A) The current market price is an input for calculating yield to call, not the result. B) Yield to call estimates the return if the bond is held until its call date. C) The coupon payment is an input for calculating yield to call, not the result. D) Yield to call does not directly assess the bond's credit risk.
Which of the following factors is NOT considered when calculating yield to call?
A) Current price is a factor in calculating yield to call. B) Face value is a factor in calculating yield to call. C) Time until the call date is a factor in calculating yield to call. D) Time until maturity is not considered when calculating yield to call.
An investor compares two callable bonds with the same face value, coupon rate, and current price. Bond A has a call date in 2 years and a maturity date in 5 years, while Bond B has a call date in 4 years and a maturity date in 7 years. Which bond is likely to have a higher yield to call?
A) Bond A has a shorter time until the call date, which generally results in a higher yield to call. B) Bond B has a longer time until the call date, which generally results in a lower yield to call. C) The bonds have different call dates, so their yield to call is unlikely to be the same. D) The information provided is sufficient to determine that Bond A will likely have a higher yield to call.
In the early 2000s, a company issued callable bonds with a 10-year maturity and 5-year call protection. The bonds had a face value of $1,000 and a coupon rate of 6%. As interest rates fell, the company decided to call the bonds after the call protection period ended. As a result, investors who had purchased the bonds at a premium had to calculate the yield to call to determine their actual return on the investment.
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Example Series 65 Example Practice Question
An investor is considering purchasing a callable bond with a face value of $1,000, a coupon rate of 5%, and a current price of $1,050. The bond has a call date in 3 years and a maturity date in 7 years. The investor calculates the yield to call to be 4.2%, which helps them decide whether the bond is a suitable investment based on their risk tolerance and return expectations.
Yield to Call (YTC) = [(Annual Interest Payment + (Call Premium + Par Value - Purchase Price) / Years to Call) / ((Purchase Price + Call Price) / 2)] It is doubtful the Series 65 exam will require you to calculate YTC. The exam will likely test your intuition about YTC's relationship with YTM and YTW. See practice questions for examples.
Suppose an investor purchases a callable bond with a par value of $1,000, a purchase price of $950, an annual interest payment of $80, a call premium of $50, and 5 years to call. Calculate the Yield to Call. YTC = [(80 + (50 + 1000 - 950) / 5) / ((950 + 1050) / 2)] YTC = [(80 + (100) / 5) / (1000)] YTC = [(80 + 20) / 1000] YTC = [100 / 1000] YTC = 0.10 or 10%