Difference Between Yield to Maturity and Yield to Call

Nowadays, life has become unpredictable. No one knows what is going to happen in another fraction of seconds, minutes, or hours. Therefore, everyone wants to be well prepared for tackling them. For ensuring and securing their and their family’s future, people tend to invest their money in different ways, such as – taking insurance policies, fixed deposits, health claims, premium bonds, investing in mutual funds and the stock market, etc. Thus, Yield to Call (YTC) and Yield to Maturity (YTM) is the terms related to it.

Yield to Maturity vs Yield to Call

The main difference between Yield to Maturity (YTM) and Yield to Call (YTC) is that Yield to Maturity (YTM) is the total amount received by a person after maturation while Yield to Call (YTC) is a form of callable bond which can be paid off early by the person.

Yield to Maturity (YTM) is the bonds received by the person after the completion of the actual maturation date. The yield of these matured bonds is higher than the yield of the bonds that are called off earlier because of whatsoever reason. Yield to maturity can be calculated by financial calculators, which are also present on the internet.

Yield to Call (YTC) is the type of bond that can be called off before their maturation. These bonds are taken aback by the issuers, which may be – the authority, municipality, corporation, etc. These bonds are a bit cheaper for the person as they tend not to pay the interest and call them off before their actual maturation day.

Comparison Table Between Yield to Maturity and Yield to Call

What is Yield to Maturity?

Yield to Maturity is a term used when a person receives all his/her total payment after the maturation of bonds. This type of bond is considered to be long-term as they last till maturity. It is also called “redemption yield” or “book yield.” 

Yield to Maturity (YTM) is often compared to the current yield because it measures the cash inflows of a bond at the current market price, which an individual can invest, and how much money they can make. Yield to Maturity bonds has the most significant assumption that if you collect your investment money half-yearly, you reinvest the money.

The formula for calculating Yield to Maturity is given below:

Yield to Maturity (YTM) = {Coupon Payment + (Face Value – Purchase Price/Number of Year till Maturation Period)} / {Face Value + Purchase Price/2}

What is Yield to Call?

Yield to Call (YTC) can be called the callable bonds, which can be called off or away before their maturation time. The bonds are issued by – authorities, corporations, municipality, etc. These bonds are considered cheaper for some of their bond-holders because they do not pay the interest on time and call them away before the final date. 

These bonds are readily available to be called off. If the interest rates of these bonds fell, then the authorities pay outstanding debt and try to get finance at a lower rate. 

Yield to Call (YTC) is calculated on approximation as no one knows when a person may call them off. The formula for calculating Yield to Call (YTC) is – 

P = (Annual Coupon Payment / 2) x {(1 – (1 + Yield to Call / 2) ^ – 2 × Number of years remaining until the call date) / (Yield to Call/2)} + (Call Price / (1+Yield to Call/2) ^ 2 × Number of years remaining until the call date)

The above formula seems a bit complicated, but it isn’t as it seems. Although it won’t help calculate YTC directly, it is mainly suggested to use financial calculators for easy calculations and save time. 

Main Differences Between Yield to Maturity and Yield to Call

Conclusion

The above terms are related to the various market investments, giving you more details about the investment interest and principal amount. Although both the words are different, one is associated with the early calling off the investment while the other is post maturation. Yield to Maturity (YTM) is something like how much principal amount with interest you received after years of maturation of the bonds. Also, the other names for YTM are “book yield” and “redemption yield”.

In contrast, Yield to Call (YTC) is an easily affordable bond for the investors as if they aren’t paying off their interest. They just called them off before the maturation date.

References

ncG1vNJzZmiZo6Cur8XDop2fnaKau6SxjZympmeUnrOnsdGepZydXZeytcPEnqVmsZmauaV506hkppmkqr%2BqwNhmmKecXa62prjDZquoZZOWua17