Chapter 14

The Yield to Call

Definition of the Yield-to-Call

When a bond is callable, i.e., redeemable prior to maturity at the issuer’s option, the cash flow implicit in the yield-to-maturity figure is subject to possible early alteration. Most corporate bonds issued today are callable, but with a certain period of call protection before the call option can be exercised. At the expiration of this period the bond may be called at a specified call price which usually involves some premium over par. This call price may decline in steps towards par in accordance with a specified time schedule.

To provide some measure of the return in the event that the issuer were to exercise his call option at some future point, the yield-to-call is often computed ...

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