The "yield to call" method is really just a special case of the yield to maturity (constant yield) method.
You use the same general principles of amortization but instead of using the yield to maturity, maturity date, and par value as your amortization factors, you use the yield to call, call date, and call price.
The tricky part is choosing WHICH yield to call and call date to use, since most callable bonds have multiple call dates.
The rule is that you should always choose the call date and associated yield to call that represents the worst return among all the available yields--this is called "yield to worst." Initially, this represents the terms on which a callable bond is quoted when you buy it and the yield to call will appear on the trade confirmation.
If the first call date passes and the bond is not yet called, then choose the next "yield to worst" among the yields associated with all remaining call dates and the maturity date.
Click on the picture above to access our amortization table generator.
If the next "yield to worst" turns out to be another call date and not the maturity date, repeat this process if the call date passes and the bond is still not called.
If you have applied the rules properly, at the time the bond is called, there should normally be no gain or loss. The cost basis of your bond has been amortized to be the same as the call price you received. Of course, a gain or loss may still occur if the bond is called earlier than the "yield to worst" call date or if you sell the bond.
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