2.1.1.3. Yield to Call
Sometimes a company will issue a bond that the company can pay off or redeem prior to its maturity date. This is known as a callable bond. An issuer may wish to redeem a callable bond when interest rates drop significantly so the company can pay off the bonds and issue new ones at a lower interest rate. The investor, on the other hand, would prefer to continue holding the bond and keep receiving those higher payments. Because a callable bond presents higher risks to the investor, callable bonds generally command a higher coupon rate than a similar bond without that provision.
Since callable bonds are likely to be redeemed at a call date before maturity, they are quoted at yield to call (YTC). Yield to call is always higher than yield to maturity for a discount bond and lower for a premium bond, depending on the call price.
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premium bonds |
price > par value |
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YTM < current yield < coupon rate |
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discount bonds |
price < par value |