Definition
YTC calculates the return if the bond issuer exercises its call option at the first available date. For bonds trading above par (premium bonds), YTC is typically lower than YTM because the issuer is likely to call the bond. Investors should evaluate the yield-to-worst (YTW) as the minimum of YTM and all possible YTCs.
functions Formula
Price = Σ(C/(1+YTC)^t) + Call Price/(1+YTC)^n
lightbulb Example
A callable bond trades at $1,050, has 4% coupon, and is callable in 3 years at $1,020. YTC ≈ 3.1%. YTM (10 years) is 3.5%. Yield-to-worst is 3.1% (the YTC).
verified_user Key Points
- Relevant for bonds trading above par
- Issuers call bonds when rates fall
- Yield-to-worst = minimum of YTM and all YTCs
- Premium bonds are more likely to be called