Difference Between Yield to Maturity and Yield to Call

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Therefore, everyone wants to be well prepared for tackling them.

For ensuring and securing their and their family’s future, people tend to invest their money in different ways, such as – taking insurance policies, fixed deposits, health claims, premium bonds, investing in mutual funds and the stock market, etc.

Thus, Yield to Call (YTC) and Yield to Maturity (YTM) is the terms related to it.

Key Takeaways

  1. Yield to maturity is the total return anticipated on a bond if it is held until it matures. In contrast, yield to call is the total return anticipated if the bond is called before maturity.
  2. Yield to call is typically lower than yield to maturity, as it assumes the bond will be called at the earliest opportunity.
  3. Yield to maturity is a better measure of the bond’s overall return potential, while yield to call is more useful for investors who want to estimate the bond’s return if it is called early.

Yield to Maturity vs Yield to Call

The difference between Yield to Maturity (YTM) and Yield to Call (YTC) is that Yield to Maturity (YTM) is the total amount received by a person after maturation while Yield to Call (YTC) is a form of callable bond which can be paid off early by the person.

Yield to Maturity vs Yield to Call

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Yield to Maturity (YTM) is the bonds received by the person after the completion of the actual maturation date. The yield of these matured bonds is higher than the yield of the bonds that are called off earlier because of whatsoever reason.

Yield to maturity can be calculated by financial calculators, which are also present on the internet.

Yield to Call (YTC) is the type of bond that can be called off before their maturation. These bonds are taken aback by the issuers, which may be – the authority, municipality, corporation, etc.

These bonds are a bit cheaper for the person as they tend not to pay the interest and call them off before their actual maturation day.

Comparison Table

Parameters of ComparisonYield to MaturityYield to Call
DefinitionTotal return received by the person after the maturation of their bonds.       It is a type of callable bond which a person decided to pay off early from its maturity.             
Length of MaturityValid if the bond is continued till maturity.Only valid if the bond is called as before maturity. 
Factors It is based on the coupon rate, time length till maturity, market price.It is based on the calculation of coupon rate, time length till call date, market price.
Concept ApplicableIt applies to non-callable bonds Only if the bond is called a bond.Only if the bond is called a bond.
Annual Rate It is expected to be 12.36%.It is expected to be 13.75%.

 

What is Yield to Maturity?

Yield to Maturity is a term used when a person receives all his/her total payment after the maturation of bonds. This type of bond is considered to be long-term as they last till maturity.

It is also called “redemption yield” or “book yield.” 

Yield to Maturity (YTM) is often compared to the current yield because it measures the cash inflows of a bond at the current market price, which an individual can invest, and how much money they can make.

Yield to Maturity bonds has the most significant assumption that if you collect your investment money half-yearly, you reinvest the money.

The formula for calculating Yield to Maturity is given below:

Yield to Maturity (YTM) = {Coupon Payment + (Face Value – Purchase Price/Number of Year till Maturation Period)} / {Face Value + Purchase Price/2}

What is Yield to Call?

Yield to Call (YTC) can be called the callable bonds, which can be called off or away before their maturation time. The bonds are issued by – authorities, corporations, municipality, etc.

These bonds are considered cheaper for some of their bond-holders because they do not pay the interest on time and call them away before the final date. 

These bonds are readily available to be called off. If the interest rates of these bonds fell, then the authorities pay outstanding debt and try to get finance at a lower rate. 

Yield to Call (YTC) is calculated on approximation as no one knows when a person may call them off. The formula for calculating Yield to Call (YTC) is – 

P = (Annual Coupon Payment / 2) x {(1 – (1 + Yield to Call / 2) ^ – 2 × Number of years remaining until the call date) / (Yield to Call/2)} + (Call Price / (1+Yield to Call/2) ^ 2 × Number of years remaining until the call date)

The above formula seems a bit complicated, but it isn’t as it seems. Although it won’t help calculate YTC directly, it is mainly suggested to use financial calculators for easy calculations and save time. 

Main Differences Between Yield to Maturity and Yield to Call

  1. Yield to Maturity (YTM) is defined as the full and final return that a person receives after completing the maturity period. In contrast, Yield to Call (YTC) can be defined as the callable bonds that a person receives before the maturity of its bonds by calling them off.
  2. The longevity of Yield to Maturity (YTM) is said to be up to the maturation date, while the length of the Yield to Call (YTC) is said to be valid before the maturity date.
  3. Yield to Maturity (YTC) bonds are redeemable after maturity, while Yield to Call (YTC) bonds can be redeemed before maturity.
  4. The annual rate expected for Yield to Maturity (YTM) is 12.36%, while Yield to Call (YTC) is 13.75%.
  5. The applicability concept for both the terms is that it is applicable on non-callable bonds for YTM, while if the bond is called a ‘bond,’ it applies to YTC.

References

  1. https://www.jstor.org/stable/2326906?casa_token=FW-yZ93na1kAAAAA%3AhL5gRCtUbYne7UVUxFl6DlRnc0W_k4MwuVgsGDdqSl6shST_N9iupGjVMMx5tab31CS8fjc5UTfFpctj1Im59XEZfL0qMf2vqA2w6dyUpy7D9V_Y95HPlA#metadata_info_tab_contents
  2. https://www.jstor.org/stable/2352053?casa_token=FD3aMbzb8UAAAAAA%3Afe4R3ni9UvBGsUrkd4H5VLDhCKFByXdTrn1ozsJMXyz9D4Qrg3eplAG6HI1Fx5Pt8csPXjqJYyv-0Qtrw8dhB1eJpoQdqIAY17R1sxYdOEsdTg4wD_SDhw#metadata_info_tab_contents

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