How to Calculate Yield to Call on a Financial Calculator

Key Concepts for Yield to Call Calculation

Yield to Call (YTC) represents the total return an investor would receive if a callable bond is bought at the current market price and held until its call date. Callable bonds grant the issuer the right to redeem them before their stated maturity date. If interest rates decline, the issuer may call the bonds to refinance at a lower rate. This means investors receive their principal back sooner, potentially at a specific call price which may include a premium over the bond’s par value. Understanding YTC provides a realistic expectation of return when early redemption is probable.

Calculating YTC on a financial calculator requires understanding several input variables. The “Present Value” (PV) represents the bond’s current market price. This value is entered as a negative number on financial calculators because it signifies an outflow of cash for the investor. The “Future Value” (FV) for YTC calculations is the bond’s call price, the amount the issuer would pay to redeem the bond. This call price is often the bond’s par value, typically $1,000, or a slightly higher amount known as a call premium.

The “Payment” (PMT) variable refers to the periodic coupon interest payment the bondholder receives. This is calculated by taking the bond’s annual coupon rate and dividing it by the number of payment periods per year. For example, if a bond has a $1,000 par value and a 5% annual coupon rate paid semi-annually, each semi-annual payment is $25. The “Number of Periods” (N) input is the total number of coupon payment periods remaining until the bond’s earliest call date. If payments are semi-annual, the number of years until the call date is multiplied by two. The final output, “Interest per Year” (I/Y), will be the yield to call per period, which then needs to be annualized.

Step-by-Step Calculation on a Financial Calculator

When using a financial calculator to determine the Yield to Call, first clear any previous time value of money calculations. On many financial calculators, this involves pressing a “2nd” function key followed by a “CLR TVM” or “CLR Work” button. Setting the payment frequency per year (P/Y) on the calculator is also a preliminary step; for most corporate and government bonds that pay semi-annually, this should be set to two.

Next, input the known variables into the corresponding financial calculator keys. Begin by entering the number of periods (N) until the call date, followed by pressing the ‘N’ key. For example, if the call date is three years away and payments are semi-annual, enter 6 and then press ‘N’. Then, input the current market price of the bond as a negative value, pressing the ‘+/-‘ key after the number, and then pressing the ‘PV’ key.

After that, determine the periodic coupon payment amount and enter it, followed by the ‘PMT’ key. Finally, input the bond’s call price as a positive value and press the ‘FV’ key. Once all relevant data points (N, PV, PMT, FV) are entered, press the ‘CPT’ (Compute) key followed by the ‘I/Y’ (Interest per Year) key.

The result displayed by the calculator for ‘I/Y’ will be the yield per compounding period. To convert this to an annualized Yield to Call, multiply the displayed result by the number of compounding periods per year, typically two for semi-annual payments.

Illustrative Example for Yield to Call

Consider a hypothetical callable bond with a current market price of $1,020. This bond has a par value of $1,000 and an annual coupon rate of 6%. The coupon payments are made semi-annually. The bond is callable in four years at a call price of $1,030.

To calculate the Yield to Call using a financial calculator, first identify the inputs. The number of periods (N) until the call date is four years multiplied by two semi-annual periods, resulting in 8. The present value (PV) is the current market price, which is an outflow, so it is entered as -$1,020. The periodic payment (PMT) is the annual coupon of 6% of $1,000, or $60, divided by two, resulting in $30 per semi-annual period. The future value (FV) is the call price of $1,030.

On the financial calculator, input these values sequentially: enter 8 and press ‘N’; enter 1020, then the ‘+/-‘ key, and press ‘PV’; enter 30 and press ‘PMT’; enter 1030 and press ‘FV’. After all values are entered, press ‘CPT’ and then ‘I/Y’ to solve for the periodic yield. The calculator will display a semi-annual yield.

Assume the calculator displays a semi-annual yield of 2.75%. To annualize this, multiply the result by two (2.75% 2 = 5.50%). Therefore, the annualized Yield to Call for this bond is 5.50%.