Transparent method
The formula
Worked example
Example inputs
How to interpret the result
A callable bond effectively hands the issuer a valuable option at the bondholder's expense, the right to redeem early exactly when falling rates make that most advantageous for the issuer and least advantageous for whoever's holding the bond, which is why a callable bond's yield to worst matters more than its yield to maturity.
Before you rely on it
What to check
Use the lower of yield to call and yield to maturity as the realistic expected return, since that's the outcome the issuer is more likely to actually deliver.
The common error
Where people go wrong with callable bond calculator
Evaluating a callable bond purely on yield to maturity while ignoring the call feature. Bonds trading at a premium are genuinely likely to get called, and the yield actually realized often lands closer to yield to call.
Sensitivity evidence
How bond market price changes the estimated yield to call
| Bond market price | Estimated yield to call | Annual coupon income | Call premium or discount |
|---|---|---|---|
| $840 | 11.5% | $60 | $180 |
| $945 | 8.1% | $60 | $75 |
| $1,050worked example | 5.1% | $60 | -$30 |
| $1,155 | 2.4% | $60 | -$135 |
| $1,260 | -0.000% | $60 | -$240 |
Every input, tested
Which input moves the estimated yield to call most
| Input | Tested from | To | Estimated yield to call at each end | Swing |
|---|---|---|---|---|
| Bond market price | $945 | $1,155 | 8.1% to 2.4% | 5.7% (112%) |
| Call price | $918 | $1,122 | 2.7% to 7.2% | 4.5% (89%) |
| Annual coupon rate | 5.0% | 7.0% | 4.1% to 6.0% | 1.9% (38%) |
| Face value | $900 | $1,100 | 4.5% to 5.6% | 1.2% (23%) |
| Years to first call | 3.0 years | 5.0 years | 4.8% to 5.2% | 0.389% (7.7%) |
| Coupon payments per year | 1 | 3 | 5.1% to 5.1% | 0.012% (0.2%) |
Two variables at once
Estimated yield to call by bond market price and face value
| Bond market price \ Face value | $800 | $1,000 | $1,200 |
|---|---|---|---|
| $840 | 10.2% | 11.5% | 12.8% |
| $945 | 6.8% | 8.1% | 9.3% |
| $1,050 | 3.9% | 5.1% | 6.2% |
| $1,155 | 1.3% | 2.4% | 3.5% |
| $1,260 | -1.0% | -0.000% | 1.0% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Bond market price | $1,050 |
| Face value | $1,000 |
| Annual coupon rate | 6.0% |
| Call price | $1,020 |
| Years to first call | 4.0 years |
| Coupon payments per year | 2 |
| Estimated yield to call | 5.1% |
| Annual coupon income | $60 |
| Call premium or discount | -$30 |
Where the inputs come from
Bond market price and face value give the price relative to par, the coupon rate sets the income, the call price is what the issuer pays to redeem the bond early, and years to first call is when it may first be redeemed. The call terms are in the bond's offering documents and on brokerage bond pages. Use the first call date to see the earliest and often worst case for the holder.
Using the estimated yield to call in a real decision
Judge callable bonds by the yield to worst rather than the coupon. If the bond trades well above the call price, expect it to be called.
When the result stops applying
The issuer's decision depends on market rates, so the call is likeliest when you would prefer to keep the bond. Reinvestment at lower rates then reduces your income. Some bonds have several call dates or make-whole provisions, and the calculator covers only the first call. Call protection periods delay the first date.
What to compare it with
The yield to call page gives the same result from the yield angle, and the yield to maturity calculator shows the alternative. The bond price and duration calculators show sensitivity. A non-callable bond of the same maturity is the natural comparison.
People also ask
Frequently asked questions
Why do callable bonds pay more?
Investors demand extra yield to compensate for the risk that the issuer will redeem the bond when rates fall, forcing reinvestment at lower yields.
What is call protection?
A period after issue during which the bond cannot be called, which gives investors a minimum stretch of income before the call risk begins.
What is a make-whole call?
A provision that requires the issuer to pay the present value of the remaining payments if it calls the bond, which makes calling costly and unlikely.