Yield to Maturity vs. Yield to Call in 2025: Key Differences and Pricing Insights
Discover the critical distinctions between yield to maturity and yield to call for bonds in 2025. Learn how callable bonds impact returns and what investors should know to maximize their investment strategy.
Understanding Yield to Maturity vs. Yield to Call in 2024
When investing in bonds, understanding yield metrics is crucial. Yield to maturity (YTM) represents the total return an investor expects if the bond is held until its expiration date. However, for callable bonds, investors must also consider the yield to call (YTC), which calculates returns if the bond is redeemed early by the issuer.
Callable bonds give issuers the right to repay the bond before maturity, often to refinance at lower interest rates. These bonds typically offer higher yields to maturity as compensation for this risk. Investors should evaluate both YTM and YTC to gauge potential returns accurately.
Essential Insights for Investors
- Yield to Maturity (YTM): Total expected return if the bond is held to maturity.
- Yield to Call (YTC): Expected return if the bond is called before maturity.
- Callable bonds usually provide higher yields but come with the risk of early redemption.
What Is Yield to Maturity?
Yield to maturity measures the overall return from purchase until the bond’s maturity date, accounting for coupon payments and capital gains or losses. For example, a municipal bond issued today might offer a YTM of 2.192% annually until it matures in 2032.
Most municipal and some corporate bonds are callable, but Treasury bonds rarely are. Calculating YTM assumes reinvestment of coupons at the same rate and receipt of all payments.
The formula for YTM incorporates the coupon rate, face value, purchase price, and years remaining until maturity:
YTM = {Coupon Rate + (Face Value – Purchase Price) / Years to Maturity} / {(Face Value + Purchase Price) / 2}
Exploring Yield to Call
Yield to call estimates the return if a callable bond is redeemed early. Issuers might call bonds when interest rates drop, allowing them to refinance at lower costs.
When a bond is called, investors receive a price typically higher than face value, reflecting accrued interest and market conditions. The sooner the call date, generally, the better the investor’s return.
Callable bonds include specified call dates, and YTC is calculated using the bond’s coupon rate, call date timing, and current market price.
Understanding both YTM and YTC enables investors to make informed decisions about callable bonds, balancing potential returns against early redemption risk.
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