What this calculator does
A callable bond lets the issuer redeem it early, and they will do so when it suits them, which is typically when rates have fallen and they can refinance more cheaply. Yield to call is the return if that happens at the first opportunity.
For a bond trading above its call price the call is bad news for the holder. A $1,050 bond callable at $1,030 in four years yields 5.29 per cent to call, below its 5.71 per cent current yield, because the $20 capital loss is spread across those four years.
The formula
The approximation takes the annual coupon plus the capital gain or loss to the call date spread evenly over the years remaining, divided by the average of the call price and the market price.
| Term | Meaning |
|---|---|
| Call price | What the issuer pays to redeem the bond early, often slightly above face value. |
| Yield to call | The return if the bond is called at the first opportunity rather than held to maturity. |
| Yield to worst | The lower of yield to call and yield to maturity, which is what a cautious investor uses. |
The inputs explained
| Field | What to enter |
|---|---|
| Face value ($) | Face value, used to calculate the coupon payment. |
| Coupon rate (%) | The annual coupon rate. |
| Call price ($) | The call price the issuer would pay on redemption. |
| Current market price ($) | The current market price of the bond. |
| Years until callable | Years until the bond first becomes callable. |
When to use it
Evaluating a callable bond
Assuming the bond runs to maturity overstates the return when a call is likely.
Calculating yield to worst
Comparing yield to call against yield to maturity and taking the lower is standard practice.
Understanding call risk
Bonds are called when rates fall, leaving the holder to reinvest at exactly the worst moment.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does the call date change the yield?
The same bond callable at three different points.
| Years until callable | Yield to call (approx.) | Current yield |
|---|---|---|
| 2 years | 4.81% | 5.71% |
| 4 years | 5.29% | 5.71% |
| 8 years | 5.53% | 5.71% |
Questions
When do issuers call bonds?
When it benefits them, which usually means after rates have fallen far enough that refinancing at a lower coupon more than covers the cost of redeeming. That is precisely the moment a holder would rather keep the bond.
Why is yield to call lower here than yield to maturity?
Because the bond trades above its call price, so an early redemption crystallises a capital loss over a shorter period. When a bond trades below the call price the relationship reverses.
What is yield to worst?
The lowest yield achievable across all possible redemption dates, including maturity. Since the issuer chooses, a conservative investor assumes they will choose whatever is least favourable to the holder.
Why is this an approximation?
Because it spreads the capital gain or loss evenly rather than discounting each cash flow properly. It is close enough for comparison, but a full present value calculation gives the exact figure.
For the return if held to maturity instead, see the bond yield to maturity calculator. For price sensitivity to rates, see the bond duration and convexity calculator.