“Yield to Redemption” (YTR), also known as “Yield to Call” (YTC) when referring to callable bonds, is a financial metric used to calculate the expected annual rate of return an investor can earn on a bond if it is held until it is redeemed or called by the issuer. This metric is especially relevant for bonds with callable features, which allow the issuer to redeem the bond before its scheduled maturity date.
The calculation of Yield to Redemption takes into account the following components:
- Face Value (Par Value): This is the nominal value of the bond, which is typically repaid to the bondholder at redemption or call.
- Current Market Price: The price at which the bond is currently trading in the market.
- Time to Redemption or Call Date: The number of years remaining until the bond is expected to be redeemed or called.
- Coupon Payments: The periodic interest payments made by the bond to the investor.
- Redemption or Call Price: The price at which the issuer will redeem or call the bond. For callable bonds, this price may be different from the face value.
The YTR calculation can be more complex than calculating Yield to Maturity (YTM), especially for callable bonds, because it involves estimating when the bond is likely to be redeemed or called, and at what price. Investors and analysts typically use financial calculators, spreadsheet software, or specialized financial functions to determine the YTR or YTC.
Yield to Redemption is a valuable metric for investors, especially when assessing callable bonds, as it helps them understand the potential return on investment if the bond is held until the issuer’s redemption or call date. It considers both coupon payments and any capital gains or losses associated with the bond’s early redemption.