Yield to call.
In plain English
Yield to call is the total return on a callable bond assuming the issuer buys it back at the earliest allowed date instead of letting it run to maturity. Issuers call bonds when rates fall, so they can refinance cheaper, which cuts your income short right when you would least want it. For a bond trading above its call price, the yield to call is lower than the yield to maturity, and the lower of the two is what a cautious investor should plan around. It answers the question: what do I really earn if this bond is taken away early?
01Why it matters
For a callable bond, the yield to maturity can overstate what you actually earn, so yield to call reveals the return if the issuer redeems it early, which is when rates drop.
02The math, step by step
A callable bond shows a 5 percent yield to maturity but a 4.2 percent yield to call. If rates fall and the issuer calls it at the first date, you earn the 4.2 percent, not the 5 percent, so you should plan around the lower figure.
03What this is NOT
Yield to call is NOT yield to maturity. It assumes the issuer redeems the bond early at the call date, which usually produces a lower return than holding to maturity when the bond trades above its call price.
04Receipts
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