Yield to Call (YTC)

Some bonds are callable, meaning the issuer keeps the right to repay the principal and stop interest before the scheduled maturity. Yield to call measures what your return would be if the issuer exercises that right at the first opportunity. It is calculated like yield to maturity, but using the call date and the call price instead of the maturity date and face value.

How it works

Issuers call bonds when it suits them, typically after interest rates have fallen, so they can refinance at a cheaper rate. That is bad for the investor: you get your money back exactly when reinvestment options have become less attractive. When you call the bond, you receive the call price (usually close to face value) plus accrued interest, and the future coupons you were counting on simply vanish.

In India

Callable bonds here are issued by PSUs, infrastructure and construction firms, NBFCs, and banks. The most prominent example is AT1 (Additional Tier-1) perpetual bonds issued by banks: these have no fixed maturity but carry call dates, and the market generally prices and yields them to the first call date rather than to perpetuity. After the Yes Bank AT1 write-down, SEBI tightened rules on selling these to retail investors, underlining how subtle their risks are.

Why it matters

For a callable bond, you should look at both YTM and YTC and reckon with the lower of the two (the yield to worst) as your realistic expectation. Relying on the headline coupon or YTM alone can flatter the return on a bond that is likely to be called away early. The practical danger is reinvestment risk: just when you most want to keep earning a high coupon, the issuer hands back your principal in a lower-rate environment. If you are buying PSU bonds or AT1 paper, always check the call schedule and assume the issuer will act in its own interest, not yours.