How to Calculate Yield to Maturity for a Callable Bond

by Michael Keenan

The yield to maturity measures the effective interest rate on a bond and assumes that you continue to reinvest the interest at the bond interest rate until the bond matures. However, some bonds carry a call feature, which allows the issuer of the bond to cash it in after a specified period of time if it chooses. For example, if interest rates fall, the issuer will call the bond and then issue a new one at the lower rates. Therefore, instead of using the maturity date, investors often use the call date.

Step 1

Subtract the price paid for the bond from the face value. For example, if you paid $99 for a bond with a face value of $100, subtract $99 from $100 to get $1.

Step 2

Divide the result by the number of years remaining until the bond can be called. In this example, if the bond can be called in five years, divide 1 by 5 to get 0.2.

Step 3

Add the result to the coupon payment. In this example, if the coupon payment equals $6, add 0.2 to 6 to get $6.20.

Step 4

Add the face value to the price paid and divide the result by two to find the average. In this example, add $99 plus $100 to get $199 and divide the result by $2 to get $99.50.

Step 5

Divide the Step 3 result by the Step 4 result to calculate the yield to call for the bond. In this example, divide $6.20 by $99.50 to get 0.0623, or a yield to maturity of 6.23 percent.