Final answer:
The yield-to-call is more conservative for a callable bond priced equal to or greater than par plus one year's interest. It accounts for the possibility that the issuer may call the bond before maturity. Yield-to-call becomes significant when assessing the return of callable bonds that are priced above their face value. The answer will be equal/greater than par plus one year's interest.
Step-by-step explanation:
The yield-to-call is a more conservative yield measure whenever the price of a callable bond is quoted at a value equal to or greater than par plus one year's interest. This is due to the potential of the bond being called before maturity, which would make the yield-to-call more relevant than the yield-to-maturity for an investor. The bond yield measures the rate of return a bond is expected to pay over time.
For callable bonds, the bondholder needs to consider the yield to call, since the issuer has the right to repay the bond before its maturity date, typically at a predetermined price. When a callable bond is priced above par value, there is a greater chance that it would be called before maturity since the issuer can refinance the debt at a lower interest rate.
For example, consider that an investor will receive the $1,000 face value, plus $80 for the last year's interest payment. If the bond's purchase price was $964, then the yield on the bond would be ($1080 - $964)/$964 = 12%.
This yield or total return includes interest payments and capital gains.
However, when interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value.