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Finance Glossary

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Yield To Call

Definition:

If a bond is callable, the relevant metric is determining the yield from date of purchase (or issue) to the first possible date that it could be called.

Example

Okay, first you gotta go read yield to maturity.

And then add the curveball that companies are afraid. Very very afraid. Of what? Inflation. And deflation. And, mainly, of looking stupid. 

So let's step into the Wayback Machine and go to 1977 when prevailing corporate bond rates were, give or take, 12%. Very expensive money rental—and that was for pretty high quality companies. If a company needed cash, a very bad path to have taken would have been to issue 30 year standard (un-callable) paper. The investors who bought it would have feasted on the 12% interest rates for 30 freakin' years. Awesome deal for the investors; horrible deal for the company.

To protect their careers, the finance people inside the company would likely have issued a call provision, say, 5 years after they'd issued, usually at a modest premium like 102 or something. That is, if the premium they pay over par is 2%, then after 5 years of paying outrageous 12% interest on paper issued at the peak of the horrible-for-investors Jimmy Carter era, the company could buy back its own paper. And pay $1,020 for each grand of par bonds out there. The prevailing rates might then be, say, 7%—so it makes a ton of sense for a company to repurchase and refinance.

So when you see a "yield to call" provision on a bond, if you think rates are going down, be wary of it; if rates are going up during the duration of that bond, it's likely that the bond's call provision won't ever be exercised. It'll just sit its fat lazy duff on the couch, clipping coupons twice a year.

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