Is YTM enough for a callable bond?
If high-coupon debt is called early, YTC and YTW complement .
An 8% coupon: what if the bond is called in year three?
Face 1,000, purchase price 1,120. Call redemption is 1,030 in year three; maturity is year ten.
What did you just see?
When rates fall, an issuer may call high-coupon debt and refinance. Investors may lose future high coupons and need to reinvest at different rates.
Call scenario assumptions
Valuation is on a coupon date, with up to five calls. Call years must precede maturity and span whole coupon periods. The final payment includes that coupon and call redemption. No default or irregular coupons.
Another example
- Maturity redemption is 1,000.
- Year-three call redemption is 1,030, while semiannual coupons remain 40.
- The minimum yield across the complete set is its YTW.
Show formal definition and formula
YTC assumes redemption at a specified coupon date and call price. YTW is the lowest nominal annual yield across maturity and all valid call scenarios.
Price = Σ[t=1..N] Coupon/(1+y/m)^t + Redemption/(1+y/m)^N; YTW = min(YTM, YTC₁, …, YTCₖ)YTC assumes redemption at a specified coupon date and call price. YTW is the lowest nominal annual yield across maturity and all valid call scenarios.
Common mistakes
YTW does not cover default, liquidity, reinvestment or early-sale risks. Actual calls depend on terms and issuer decisions; this page compares only your defined cash-flow scenarios.
Frequently asked questions
What if no call scenarios are entered?
Only maturity is considered, so YTW equals YTM. If an entered scenario is invalid, YTW is N/A rather than silently excluding it.
You can now explore…
- Call timing and redemption change yield
- Why YTW is not a guaranteed return
Term reference4 terms
Open a term when you need a reminder. Underlined words in the article work too.