Yield to Call
Candlefocus EditorFor callable bonds, investors need to consider the call feature and the yield to call when making an investment decision. Generally, a bond with a lower yield to call will offer lower return when compared to yields to maturity of similar bonds. On the other hand, bonds with higher yield to call is more attractive, as it often offer higher returns.
Where a callable bond pays out regular coupon payments, the yield to call measures the rate of return the bondholder receives before the call date. The calculation of yield to call depends on the call date and the price of the bond. Although the coupon rate of a bond generally remains constant until its maturity, the actual return gained by a bondholder may fluctuate due to the bond’s call feature, depending on the realized yield to call.
When an issuer of the callable bond calls the bonds, the bondholders who own the bonds receives the call price, which is generally higher than the market price. As a result, the investor may benefit from the call of the bond and realize a higher return due to the higher call price. Consequently, the yield to call lies between the yield to maturity and the call price.
Investors should monitor the changes in the market price of a callable bond over time and compare their realized yield to call with the yields to maturity of similar types of bonds to decide if they should hold or sell the bond before it is called. The decision is largely dependent on the associated risks, bond prices and the investor’s own investment philosophy and goals.
In conclusion, yield to call is an essential factor for bond investors to consider when investing in callable bonds as it measures the return an investor will likely receive if the bond is held until the call date. To maximize return, investors need to understand the impact of the call feature and determine the realized yield to call of the bond in comparison to other similar bonds.