Yield to Maturity &Yield to Call of bond l. Essentials of Investments Course. CPA Exam BAR. CFA Exam

IN this video I discuss the yield to maturity on a bond. A bond's yield to maturity (YTM) is the internal rate of return required for the present value of all the future cash flows of the bond to equal the current bond price.

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Yield to Maturity vs. Yield to Call: An Overview
The buyer of a bond usually focuses on its yield to maturity (the total return that will be paid out by a bond's expiration date). But the buyer of a callable bond also wants to estimate its yield to call.


A callable bond can be redeemed by its issuer before it reaches its stated maturity date. Callable bonds usually offer a more attractive yield to maturity, along with the proviso that the issuer may "call" it if overall interest rates change and it finds it can borrow money less expensively in another way.1


Therefore, two numbers are important to the investor considering callable bonds: Yield to maturity and yield to call. The date of a call, if there is one, is unknown up front, but it can be estimated.

KEY TAKEAWAYS
Yield to maturity is the total return that will be paid out from the time of a bond's purchase to its expiration date.
Yield to call is the price that will be paid if the issuer of a callable bond opts to pay it off early.
Callable bonds generally offer a slightly higher yield to maturity.