Many bonds, including corporate and municipal securities are callable and will have a yield to call.
An issuer that puts a call feature on a bond is inserting that date as a way to refinance out early, if they choose to do so. The advantage to the issuer is that if interest rates decline, the municipality or corporation can redeem the higher interest rate bond and replace it with a lower bond rate. If this take place, the investor will realize a yield to call - instead of a yield to maturity.
Whether the YTC is better or worse for the investor will depend on when the redemption takes place and what price the bond is called at. The price is important, as it can be below, the same, or higher than the price the invetor paid. That will determine call yield.
If the bond is called at a higher price than what was paid, the YTC will be higher and vice versa.
The main risk with a bond that is called is it forces the investor to reinvest the money at a lower rate, as bond yields should be lower in the market at that time.
There could be other reasons for calling a bond early such as: rearranging maturities or just having the money to not have to offer the debt anymore. There is no reason to issue bonds if you don't need the money.
http://www.brokerjobs.com/bondyield.htm
An issuer that puts a call feature on a bond is inserting that date as a way to refinance out early, if they choose to do so. The advantage to the issuer is that if interest rates decline, the municipality or corporation can redeem the higher interest rate bond and replace it with a lower bond rate. If this take place, the investor will realize a yield to call - instead of a yield to maturity.
Whether the YTC is better or worse for the investor will depend on when the redemption takes place and what price the bond is called at. The price is important, as it can be below, the same, or higher than the price the invetor paid. That will determine call yield.
If the bond is called at a higher price than what was paid, the YTC will be higher and vice versa.
The main risk with a bond that is called is it forces the investor to reinvest the money at a lower rate, as bond yields should be lower in the market at that time.
There could be other reasons for calling a bond early such as: rearranging maturities or just having the money to not have to offer the debt anymore. There is no reason to issue bonds if you don't need the money.
http://www.brokerjobs.com/bondyield.htm
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