Question 1

Will my callable bond definitely be called?

Accepted Answer

Not necessarily. Issuers call when it's economically advantageous - typically when current rates are below the coupon. However, even if rates drop, issuers may not call due to transaction costs or cash flow needs. YTC shows what happens IF called, not that it WILL be called.

Question 2

Why does YTC differ from YTM?

Accepted Answer

YTC uses call date and call price instead of maturity and par. If you paid a premium and the bond is called, you lose that premium faster (shorter time to call). If you paid a discount, you gain that discount faster. The timeframe and terminal value both differ.

Question 3

What is yield to worst and why is it important?

Accepted Answer

Yield to Worst (YTW) is the lowest of YTM and all possible YTCs. It's the minimum return you'd receive under any call scenario. For callable bonds, YTW is the most conservative and commonly quoted yield - it's what you should plan around.

Question 4

How do I know if a bond will be called?

Accepted Answer

Bonds are most likely to be called when: (1) trading well above call price, (2) coupon significantly exceeds current rates, (3) issuer has cash or cheaper financing available. Check the call schedule and compare coupon to current rates. If coupon is 7% and rates are 4%, expect a call.

Question 5

Should I avoid callable bonds?

Accepted Answer

Not necessarily. Callable bonds typically offer higher yields than non-callable as compensation for call risk. If you don't mind reinvestment risk and like the yield, callable bonds can be attractive. Be aware of call risk and don't overpay for premium callable bonds.

Question 6

What happens when my bond is called?

Accepted Answer

You receive the call price (often par or slight premium) and any accrued interest. Your position is closed - no more coupon payments. You then need to reinvest the proceeds, typically at lower yields (since issuers usually call when rates fall).

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