From the course: Applied Fixed Income

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Yield to call

Yield to call

From the course: Applied Fixed Income

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Yield to call

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- [Instructor] Referring back to our Fixed Income Fundamentals course, a bond return can be measured by its yield to maturity, and yield to maturity is based on the understanding that a investor purchases the security at the current market price and holds that security until it's matured and reached its full value. And the interest payments can also be reinvested at that exact same yield-to-maturity, or YTM. The problem for callables, as you can envision, is how to measure the bond's return if it may get called away before maturity. Therefore for callables, a more common yield measure is what we call yield-to-call. As the name implies, yield-to-call calculates the return a bond holder will receive for purchasing a callable bond if the bond is only held until the call date. It's the compound discount rate that when applied to the callable bond's future cash flows makes the sum of these cash flows equal to the current market price of that bond. On this slide, I'm showing the cashflow…

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