# What is Yield to Call (YTC)?

Definition: Yield to call (YTC) represents the return that one would earn if they held a note or bond until its call date before the debt instrument matures. In other words, it’s the earnings you would receive if you held a bond until it was called before it matured.

## What Does Yield to Call Mean?

What is the definition of yield to call? Callable bonds are a feature throughout finance, but especially in corporate bonds. The call option allows companies to be flexible with their interest rates if those rates drop, and also allows investors to earn a higher return than if they held the bond to maturity. Callable bonds are particularly useful to corporations when market interest rates drop, as they can call their existing bonds, and sell new bonds at the lower rate. In effect, a callable bond could be less expensive to the issuer than a normal bond in a period of declining interest rates.

Let’s look at an example.

## Example

Toyota, Inc. wants to raise capital for a new expansion plant, and executives decide that debt is the most efficient option available to the firm. They engage a bank, and the bank gives them two options for a bond of \$10,000: a normal bond with a maturity of 20 years, but an interest rate of 8%, and a callable bond with a 20 year maturity, an interest rate of 10%, but a callable date after only 5 years. The company must now weigh the potential expense of each option over the next few years.

Since the market is experiencing extremely high interest rates, Toyota executives decide to choose the callable bond. Think about it: Would the firm rather be stuck paying (\$10,000 x .1) = \$1,000 each year for twenty years, for a total of (\$1,000 x 20 + \$10,000) = \$30,000, or pay \$1,000 per year for the first 5 years, then call the bond and refinance at a new interest rate of 3%? This second option, in all, costs the firm (\$1,000 x 5 + \$10,000 + (\$10,000 x .03 x 15 + \$10,000)) = \$29,500 over the same period, and allows the firm to be flexible with their interest payments.

## Summary Definition

Define Yield-to-Call: YTC means the total income received from a bond if the debt instrument is held until its call date.