Lesson

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.

Practice Question #1

What is the primary purpose of calculating yield to call for a callable bond?

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Terms

Yield to call (YTC):
The return on a bond if it is held until its call date.
Call date:
The date when the issuer can redeem the bond before its maturity date.
Callable bond:
A bond that the issuer can redeem before its maturity date.

Practice Question #2

Which of the following factors is NOT considered when calculating yield to call?

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Do Not Confuse With

Yield to maturity (YTM):
The return on a bond if it is held until its maturity date.
Yield to worst (YTW):
The lowest potential yield on a bond, considering all possible call dates and the maturity date.
Current yield:
The annual interest payment divided by the bond's market price.

Practice Question #3

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?

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Historical Example

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.

Practice Question #4

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Real-World Example

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.

Practice Question #5

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Formulas to Remember

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.

Practice Question #6

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Formula 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%

Practice Question #7

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Pitfalls to Remember

Early Call Risk:
Yield to Call assumes the bond will be called at the first call date. However, the issuer may call the bond earlier or later than expected, which can affect the actual yield received by the investor.

Practice Question #8

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Practice Question #9

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