How to Calculate Yield for a Callable Bond

If a bond is "callable," it means that the issuer has the right to buy the bond back at a predetermined date before its full maturity date. The call could happen at the bond's face value, or the issuer could pay a premium to bondholders if it decides to call its bonds early.

For callable bonds, knowing the coupon rate and yield to maturity only tells you part of the story. To make informed investment decisions, you need to know what the bond's yield would be if it were called, since oftentimes this is lower than the other yield figures might lead you to believe. With that in mind, here's how to calculate yield to call for your bonds.

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The word bonds on an electronic board. — Image source: Getty Images.

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Looking at the numerator of this formula, the left side (coupon interest payment) accounts for the annual dividend payments and the right side annualized the discount or premium you would pay to buy the bond. Putting this together gives you the total annual effective interest from now until the call date. Finally, dividing by the average of the call price and the market value will convert this annual interest amount into a rate. Multiply the final result by 100 to convert to a percentage.

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If the issuing company remains solvent, bonds can be a good, stable investment.

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So, since you were able to buy this bond at a discount to par value, its yield to call is actually more than if you hold the bond to maturity. Now time to put that information to good use -- by picking an online broker and getting started investing today!

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