What is Yield to Call?
Yield to call is a measure of the expected return that an investor could realize if they were to purchase a bond and then hold it until the bond's call date. This is the date when the issuer can repurchase the bond from the investor before its maturity.
How to calculate the Yield to call?
The yield to call is calculated by taking into account any periodic interest payments (coupon payments) as well as any premium or discount paid for the bond.
To calculate yield to call, you must also consider factors such as the current market rate of return offered on similar bonds, the amount of time remaining between now and the bond's call date, and any relevant features of the issuer or security such as creditworthiness and riskiness.
Benefits of Yield to call
Yield to call is a preferable option for many investors seeking lower risk and a higher return on their investments. When purchasing a bond that yields to call, investors agree to receive fixed payments only until the "call date" arrives. After the call date has passed, the issuer of the bond has the option to purchase the bonds at face value.
This early redemption option offers benefits for both the issuer and investors alike. For issuers, yield-to-call bonds give them more flexibility by allowing them to redeem debt quicker than other forms of bonds. For investors, this structure eliminates certain risks associated with bonds due to their ability to receive higher interest payments and return their original investment sooner than expected.