When an investor purchases a bond, they can hold it to maturity or until the call date which is earlier than maturity. As of the call date a bond issuer may redeem bonds at a specific price called the call price. Bondholders may choose to sell their bonds back to the bond seller as of the call date. The yield to call is an interest rate. It is the compound interest rate at which the present value of a bond’s future coupon payments and call price is equal to the current market price of the bond.

## How to Find Yield To Call

To find the yield to call of a callable bond work backwards to find the compound interest rate necessary for the future payments of the bond at the current bond price to equal the current bond price. The calculation must be done by successive approximations to get the final result but what people do in the real world is use a computer program that does all of the work for you. Here is the formula to use.

P = (C / 2) x {(1 – (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)

Where:

P = the current market price
C = the annual coupon payment
CP = the call price
t = the number of years remaining until the call date
YTC = the yield to call

## How to Calculate Yield To Call

As noted, the most practical way to get the yield to call rate on a callable bond is to click the “solve for” button on a computer program that does this calculation. If you really want to do this “long hand” you will need to do successive iterations to get the final approximation and will need to do it again the next time you are interested because the market price of the bond may have changed since the last time you did the calculation.

## Can Yield To Call Be Negative?

Yield to call can be negative under specific circumstances. A negative yield to call means that your internal rate of return as an investor at the current price will be less than zero if your bond is called on the next call date. When checking on yield to call for a security with a call date more than a year in advance this is an internal rate of return calculation but such is not always the case when the call date is less than a year when returns can, in fact, be negative.

## Can Yield To Call Be Higher Than Yield To Maturity?

Bond buyers typically consider the yield to maturity when purchasing a bond. This is the total return paid out at the expiration date of the bond. However, knowing the yield to call is also important. This is because callable bonds can be redeemed prior to maturity by the issuer if they choose to do so. A bond issuer will redeem callable bonds early when a change in interest rates makes it more profitable to do so. This is generally when rates fall and the issue can borrow new money at a lower cost.

## How to Calculate Yield to First Call

When calculating yield to the first call the calculation starts with the current market price of the bond and the yearly coupon payment. Then the call price is taken into consideration followed by the call price and time in years until the first call date. The two variables in this calculation are the current market price and the time remaining until the first call. The call price is set as is the yearly coupon payment. Interest rate changes over time are what determine the yield to the first call.