YTC yield to call

CFA Level I
#1

Please can someone explain what it means am a little confused on the concept

#2

One way to explain the YTC is the calculated yield to the first call by the borrower. For example, a 5 year 10% coupon bond, priced at 950 and with a call price of 1012 3 years from now will have a YTC = 12.45%

Based on N = 3 PMT = 100 FV = 1012 and PV = (950)

The YTC is different from the yield you receive if you hold the bond to maturity.

For the YTM, the bond will be held for the 5 year term vs being held for a 3 year term once it has been called.

#3

Thanks!

#4

Think of YTC as YTM, where the “maturity” is the first date that the bond can be called, and “par” is the price the issuer will pay you when they call the bond (likely at a premium).

Suppose you buy a 10-year, $1,000 par, 6% coupon, semiannual pay bond that is callable after 5 years at 104; you pay $980. You calculate the YTM as:

n = 20, PMT = 30, PV = -980, FV = 1,000, compute i = _ 6.27% _.

You calculate the YTC as:

n = 10, PMT = 30, PV = -980, FV = 1,040, compute i = _ 7.16% _. The calculation is essentially the same, but you use a 5-year “maturity” (n = 10) and a premium future value (FV = 1,040).

If the bond has several call provisions – for example, it’s callable after 5 years at 104, callable after 7 years at 102, and callable after 9 years at par – then you can calculate the yield to first call (YT1C), yield to second call (YT2C), and yield to third call (YT3C).

#5

thanks s2000magician i understood,

#6

My pleasure.

Cool!