Yield to Call

Some bonds are callable, meaning the issuer can repay them before maturity, usually at a set price and after a certain date. Issuers tend to call bonds when interest rates have fallen, so they can refinance at a lower rate.

For investors, this creates uncertainty. If a bond is called early, they receive their money back sooner and lose the remaining coupon payments. Yield to call calculates the return assuming the bond is repaid on its call date at its call price.

For example, a ten-year bond with a 5% coupon might trade at 1,050 and be callable in three years at 1,020. Its yield to maturity is about 4.4%, but its yield to call is only about 3.8%, because the investor would lose the premium paid above the call price over a shorter period.

When a bond trades above its call price, yield to call is usually lower than yield to maturity. Cautious investors often look at the lowest of the possible yields, known as yield to worst, to avoid overestimating their likely return.