7.2 The Yield-to-Call (YTC)
Definition
The Yield-to-Call (YTC) is the yield (IRR) one would earn, to the first call, if one purchased the bond and it were called away – on the first call date.
Let’s look at an example.
Given:
| Maturity | 10 Years |
| Coupon | .07 (Annual) |
| YTM | .07 (Annual) |
| Callable | 3 years |
| Call Price | 102 |
| YTC | ? |
Solution Method
- Substitute First (or next) Call Price for Par Value.
- Substitute Term-to-Call for Term-to-Maturity.
- Adjust the number of years.
[latex]P_{Bond}=Σ\frac{C_{i}}{(1 + YTC)^{n}}+\frac{Call Price}{(1 + YTC)^{n}}[/latex]
100 = [ (7) ÷ (1 + YTC annuity) 3 ] + [ (102) ÷ (1 + YTC)3 ]
YTC = ?
Question
Is the YTC <, =, or > YTM2?
Note:
The “annuity” represents the sum of the coupon cash flows.
