Yield to Call (YTC) Meaning & How It Works

Suppose a company borrows money by issuing bonds to fund its growth. Now, what if interest rates drop significantly a few years later? The company may retire the bonds early to refinance at a lower cost. This option to repay bonds before their maturity date is called a "call option," and it can have a big impact on the returns investors receive. That’s where Yield to Call (YTC) becomes an important concept to understand.

What is Yield to Call?

Think of a bond like a loan you give to a company or government. It has a fixed schedule of interest payments and a promise to return the principal at maturity. However, some bonds are "callable," meaning the issuer can repay them early, usually after a certain period.

Yield to Call (YTC) is the annualised return you’d earn if the bond is called at the earliest date allowed, instead of being held to its full maturity. Unlike Yield to Maturity (YTM), which assumes you have the bond until the end, YTC gives you a more realistic estimate of returns when early repayment is possible.

How Yield to Call Works?

Yield to Call (YTC) measures the potential return an investor may earn if a callable bond is redeemed by the issuer before its scheduled maturity date. Callable bonds feature a predetermined call date and call price, enabling the issuer to repay investors earlier than expected.

Instead of projecting returns to the final maturity date, YTC calculates the yield only through the First call date. It factors in the bond’s current market price, the coupon payments you will receive through the call date, and the amount the issuer will repay if it exercises the call option.

 

YTC becomes particularly important for bonds trading at a premium or for bonds where early redemption is a realistic possibility. It helps investors understand not just how much they might earn, but also how long they may realistically hold the bond if the issuer chooses to call it.

Pros and Cons of Yield to Call

Yield to Call provides valuable insight into callable bonds, but it must be evaluated carefully because of the uncertainties associated with callability.

Pros

• Helps investors estimate returns if the bond is redeemed early.
• Offers a clear comparison between callable and non-callable bonds.
• Highlights how call features influence expected income and cash flow.
• Useful when assessing bonds with higher coupon rates, where issuers may consider refinancing.
• Helps investors judge whether the call option affects the bond’s valuation and suitability.

Cons

 

• YTC assumes the bond is called on the stated call date at the specified call price.
• Actual returns may differ if the bond is not called and is held to maturity, in which case YTM becomes the more relevant measure.
• Callable bonds expose investors to reinvestment risk, particularly when interest rates decline, and issuers prefer to refinance.
• A higher YTC may reflect higher credit risk, lower liquidity, or uncertainty around whether the call will occur.
• YTC values change with market conditions, making them more volatile than simple coupon-based calculations.

How Do Callable Bonds Work?

Imagine a company issues a 10-year bond but includes a call option to repay the bond after 5 years. If market interest rates fall during those 5 years, the company might call the bond early and refinance its debt at a cheaper rate. While this saves the company money, it changes what investors can expect to earn.

Callable bonds are common in both corporate and government markets. The bond’s terms will specify the earliest call date and the call price, often the bond’s face value or a slight premium above it.

Why is Yield to Call Important?

When interest rates drop, issuers often choose to repay bonds early to refinance at lower costs, which can affect the returns investors expect. In such cases, understanding Yield to Call becomes essential because:

Gives You a Realistic Picture 

If a bond is likely to be called early—say, when interest rates drop—Yield to Call (YTC) tells you what kind of return you might get. It helps you set the right expectations instead of hoping for the full-term yield.

Helps You Weigh the Risk

Callable bonds often pay higher interest because the issuer might take them back early. YTC lets you compare these with non-callable bonds to see if the extra return is worth the trade-off.

Keeps Your Plans on Track

Knowing both YTC and YTM (Yield to Maturity) gives you a clearer sense of how your investment might play out. This way, you can choose bonds that match your financial goals—whether regular income, long-term growth, or a mix of both.

Bondbazaar makes it easy to compare callable bonds, view YTM and YTC, and select investments that suit your risk appetite and return expectations.

Understanding the Yield to Call Formula

The yield to call formula to calculate the yield is as follows:

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

Here, 

• P = Bond’s current market price

• C = Annual coupon payment

• CP = Call price

• t = Number of years remaining until the call date

• YTC = Yield to call

Here is an example to calculate yield to call using the formula:

Suppose a callable bond has a face value of Rs 2,000 and pays a semi-annual coupon rate of 8%. The bond's current price is Rs 2,150, which can be called at Rs 2,050 after four years. The remaining years till maturity are not important for this calculation.

Using the yield to call formula, the calculation would be as follows:

Rs 2,150 = (Rs 160 / 2) x {(1 - (1 + YTC / 2) ^ -2(4)) / (YTC / 2)} + (Rs 2,050 / (1 + YTC / 2) ^ 2(4))

The yield to call for this bond would be around 6.15%.

Difference Between Yield to Call and Yield to Maturity

Yield to call (YTC) and yield to maturity (YTM) are key metrics for bond investors, especially when evaluating callable bonds. Here’s a comparison of their main differences:

Key Considerations for Investors

When investing in bonds, investors should weigh several important factors that can influence returns, liquidity, and tax outcomes throughout the bond’s tenure.

1. Interest Rate Movements: Issuers are more likely to call bonds when market interest rates fall, so your high-coupon bond may be redeemed just when you want to keep it.

2. Call Protection: Some bonds have a “call protection” period during which they cannot be redeemed early. This can provide some assurance of steady returns for a set time.

3. Premium or Discount: If you buy a bond at a premium and it’s called early, your effective return may be lower than expected.

4. Liquidity: Ensure the bond is listed and can be traded easily. Platforms like Bondbazaar offer high liquidity and transparency, allowing you to buy and sell bonds easily.

5. Taxation: Interest income from bonds is taxable as per your income slab, and capital gains tax may apply if you sell before maturity or call.

Considering these aspects, investors can make the right decision, maximise their bond investments, and be wiser while handling the fixed-income market.

How to Use Yield to Call in Your Investment Strategy?

Incorporating yield to call into your investment strategy can help you make more informed decisions with callable bonds.

• Compare with YTM: Always check both YTC and YTM before investing in callable bonds.
• Diversify: Don’t rely solely on callable bonds; include a mix of non-callable, government, and corporate bonds for balanced risk and return.
• Use Technology: Platforms like Bondbazaar provide tools to compare YTC, YTM, and other key metrics across thousands of bonds, making it easier to find the right fit for your portfolio.

By making the best use of YTC, you can maximise returns and manage risk more effectively on your fixed-income portfolio.

When Does Yield to Call Matter the Most?

Yield to Call becomes especially relevant in scenarios where interest rate trends or issuer strategies influence the likelihood of early redemption.

YTC matters most in falling interest rate environments, as issuers may choose to refinance existing debt at lower borrowing costs. Callable bonds with high coupon rates become prime candidates for early redemption because refinancing reduces the issuer’s interest burden. In such situations, investors must assess whether their expected returns may be reduced if the bond is called.

YTC is also crucial when evaluating bonds trading at a premium, since the premium amount may not be fully recovered if the bond is redeemed early. This can materially reduce investor returns, making YTC a more accurate indicator than Yield to Maturity (YTM).

YTC matters in bonds with short call periods, where early cash-flow interruptions may affect an investor’s financial planning. Investors who rely on periodic coupon payments must consider whether early redemption may impact their income expectations.

Understanding when YTC matters helps investors avoid misjudging a callable bond’s long-term earning potential and ensures better alignment between investment choices and financial goals.

Conclusion

Knowing what yield to call is and how to calculate it is key when investing in callable bonds. It gives a realistic picture of returns if the bond is redeemed early, a common scenario when market interest rates shift. This insight helps you manage reinvestment risk and align your investments with your financial goals.

With Bondbazaar, you get access to a vast range of bonds offering 8-14%* fixed returns, all on a regulated, transparent platform where buying and selling bonds is just a click away. Whether you’re an experienced investor or just starting, understanding yield to call can help you make smarter, more rewarding fixed-income investments.