Covered Bonds
February 12, 2025
The bond market is much larger in size as compared to the equity markets of the world. This is because a large portion of the bonds sold in the market is sovereign debt. For more than two centuries, various countries have been routinely turning to the bond market in order to borrow money. With the […]
Before the advent of globalization, every country in the world was working in a vacuum when it came to taxes. This is because the companies which operate in these countries did not have any choice when it came to tax rates. Their only choices were to accept the tax rates or to stop production. If […]
Whenever investors pool their resources together in order to create a fund that then invests in other assets, the concept of fiduciary duty comes into play. The average investor considers fiduciary duty to be a complex legal subject and hence tries to avoid delving into the details. However, the subject is not very complex. Also, […]
Corporate income tax is collected when there is corporate income i.e. when the revenue collected by the corporation exceeds the expenses incurred by this. However, this need not always be the case. It is equally possible that a corporation may incur more expenses than it earns in revenue, thereby incurring a loss. This is truer […]
The retail business is inherently a cash flow positive business. This is generally because of the fact that retailers are generally able to procure their stock on credit. However, when it comes to liquidating their stock in the form of sales, retailers generally receive payments in the form of cash or credit cards. Hence, receivables […]
In the previous articles, we have studied the concept of yield to maturity. We now know how to calculate the yield on a particular bond. We also know why the calculation of this yield is important. However, it is important to realize that not all bonds are held until maturity. There is a large portion of bonds that are issued in the market which have callable features. This means that if the market interest rate reduces significantly, the issuer has an option to call their old bonds and then raise new bonds at a lower rate. The yield to maturity calculation becomes somewhat irrelevant for such bonds since they are unlikely to exist till maturity. Hence, it is common for investors to calculate yield to call and use that as a proxy for yield to maturity.
In this article, we will have a closer look at the concept of yield to call. We will also try to understand how it impacts the valuation of a bond.
The concept of yield to call is applicable only to the bonds which have a call feature. Theoretically, it is possible for bonds to be called at any time before their maturity. However, in real life, such bonds do not exist. It is common for callable bonds to have a schedule when these bonds can be called. For instance, it is possible for a bond to be called every five years. Hence, if the maturity is fifteen years, there is a possibility that the bond may be called either at five years or at ten years.
The concept of yield to call assumes that the bond will actually be called by the issuer at the earliest possible date. Hence, the yield i.e. the return provided by the bond is calculated based on such a scenario. Since the yield is calculated till the call date and not the maturity date, it is called yield to call.
Although, theoretically, investors are only supposed to calculate yield to call for the first call date. However, in reality, it is common for investors to calculate the yield to call for all possible call dates. These numbers are usually calculated beforehand and are taken into account while deciding whether or not to purchase the bond.
The calculation of yield to all is quite similar to the calculation of yield to maturity. Just like yield to maturity, yield to call is also made up of three parts.
Yield to call is important since it helps investors make several key decisions regarding a bond. Some of these important decisions have been listed below:
The bottom line is that yield to call is a very important metric for callable bonds. This is because yield to maturity becomes irrelevant in the case of such bonds. It is common for bond investors to systematically track this number and use it to make investment decisions.
Your email address will not be published. Required fields are marked *