Yield to Call Calculator

1. What is the Yield to Call Calculator?

Definition: This calculator computes the yield to call (YTC) for a callable bond, representing the annualized return an investor would earn if the bond is called before maturity.

Purpose: Assists bond investors in evaluating the potential return of a callable bond, aiding in investment decisions and portfolio management.

2. How Does the Calculator Work?

The calculator uses the following formula to compute the yield to call:

Formula:

$ \text{YTC} = \left( \frac{i + \frac{P_c - P_m}{n}}{\frac{P_c + P_m}{2}} \right) \times 100 $

Where:

$ \text{YTC} $: Yield to call (percentage)
$ i $: Annual interest (USD)
$ P_c $: Call price (USD)
$ P_m $: Current market price (USD)
$ n $: Number of years until call (years)

Steps:

Step 1: Input parameters. Enter the annual interest ($ i $), call price ($ P_c $), current market price ($ P_m $), and years until call ($ n $).
Step 2: Calculate YTC. Compute the yield to call using the formula provided.

3. Importance of Yield to Call Calculation

Calculating yield to call is crucial for:

Investment Evaluation: Helps investors assess the return potential of callable bonds compared to holding to maturity.
Risk Assessment: Accounts for the possibility of the bond being called early, affecting returns.
Portfolio Planning: Enables comparison of different callable bonds based on their YTC.

4. Using the Calculator

Example: $ i = \$21.00 $, $ P_c = \$150,000.00 $, $ P_m = \$32,000.00 $, $ n = 7 $:

Step 1: Input $ i = 21.00 $, $ P_c = 150000.00 $, $ P_m = 32000.00 $, $ n = 7 $.
Step 2: Calculate YTC: $ \left( \frac{21 + \frac{150000 - 32000}{7}}{\frac{150000 + 32000}{2}} \right) \times 100 \approx 18.547\% $.
Result: YTC = 18.547%.

This result indicates that an investor would earn an annualized return of approximately 18.547% if the bond is called in 7 years.

5. Frequently Asked Questions (FAQ)

Q: What does a high YTC indicate?
A: A high YTC suggests a higher potential return if the bond is called, often due to a significant difference between the call price and market price.

Q: How is the annual interest determined?
A: It’s the annual coupon payment, specified in the bond’s terms, typically based on the bond’s face value and coupon rate.

Q: Can YTC be negative?
A: Yes, if the bond’s market price is significantly higher than the call price plus interest, though this is rare.