Yield to Maturity (YTM): Understanding and Conditions
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but is expressed as an annual rate. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate. Yield to maturity is also referred to as “book yield” or “redemption yield.”
Key Points
Yield to maturity (YTM) is the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal.
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YTM is essentially a bond’s internal rate of return (IRR) if held to maturity.
Calculating the yield to maturity can be a complicated process, and it assumes all coupon or interest, payments can be reinvested at the same rate of return as the bond.
Understanding Yield to Maturity (YTM)
Yield to maturity is similar to current yield, which divides annual cash inflows from a bond by the market price of that bond to determine how much money one would make by buying a bond and holding it for one year. Yet, unlike current yield, YTM accounts for the present value of a bond’s future coupon payments. In other words, it factors in the time value of money, whereas a simple current yield calculation does not. As such, it is often considered a more thorough means of calculating the return from a bond.
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Originally published at https://theinvestonomy.blogspot.com on June 18, 2022.
