Yield to call is a calculation of the total return from investing in a bond assuming it is held until the call date, and is used to assess whether to invest. The formula involves dividing annual income by the principal amount and market price, with the difference between purchase and call price subtracted. Yield to call is similar to yield to maturity, but assumes a shorter life for the bond. Investors should consider both yields before investing.
A yield to call is the calculation of the total return that will result from investing in a bond, assuming the bond is held through the date of the call. It is also assumed that the price of the call will remain constant and will not be affected by some irregular set of factors during the life of the bonus. Investors will often use the call yield calculation as part of their assessments of whether or not to invest in the bond issue.
The formula for calculating a return to call is very simple. Essentially, it involves dividing the total annual income from the callable bond by the current principal amount and the market price. From this figure, the difference between the purchase price and the call price is subtracted. In the event that the purchase price is less than the purchase price, the time value of the difference will also be factored into the calculation. The final answer will be in percentage form and will serve as an indicator of the amount of return the investor can reasonably anticipate.
In many ways, a yield on demand is very similar to calculating a yield to maturity. However, there is a critical difference to be aware of. The call yield anticipates a shorter life for the bonds under consideration, as the call date may or may not be the same as the maturity date. A yield to maturity assumes that there will be no early call for the bond, and that it will remain in force until full maturity is reached.
It is not unusual for investors to project both a return to sight and a return to maturity as part of the process of considering a given investment. When it comes to investing in bonds, it’s actually very wise practice to look at the projected return given the two different sets of circumstances. If the investor considers that the yield in both scenarios is within the acceptable perimeters, then he can feel free to proceed with the purchase of the bond.
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