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Yield To Maturity

Yield to maturity (YTM) is the overall rate of return expected on a bond if held until maturity. It takes into account the present market price, par value, coupon payments, time to maturity, and reinvestment rate of coupon payments. YTM can be estimated using tables but is usually calculated using a programmable calculator given its complexity. Variants include yield to call, yield to put, and yield to worst, which consider options that shorten the bond's expected lifespan like calls or puts. The YTM also impacts whether a bond trades at a premium, discount, or par based on its relationship to the coupon rate.

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124 views3 pages

Yield To Maturity

Yield to maturity (YTM) is the overall rate of return expected on a bond if held until maturity. It takes into account the present market price, par value, coupon payments, time to maturity, and reinvestment rate of coupon payments. YTM can be estimated using tables but is usually calculated using a programmable calculator given its complexity. Variants include yield to call, yield to put, and yield to worst, which consider options that shorten the bond's expected lifespan like calls or puts. The YTM also impacts whether a bond trades at a premium, discount, or par based on its relationship to the coupon rate.

Uploaded by

preet13
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Yield To Maturity - YTM

What Does Yield To Maturity - YTM Mean?


The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a
long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the
current market price, par value, coupon interest rate and time to maturity. It is also assumed that
all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for
short.

Investopedia explains Yield To Maturity - YTM


An approximate YTM can be found by using a bond yield table. However, because calculating a
bond's YTM is complex and involves trial and error, it is usually done by using a programmable
business calculator.

Yield to maturity
The Yield to maturity (YTM) or redemption yield of a bond or other fixed-interest security,
such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who
buys the bond today at the market price, assuming that the bond will be held until maturity, and
that all coupon and principal payments will be made on schedule. Yield to maturity is actually an
estimation of future return, as the rate at which coupon payments can be reinvested when
received is unknown.[1] It enables investors to compare the merits of different financial
instruments. The YTM is often given in terms of Annual Percentage Rate (A.P.R.), but more
usually market convention is followed: in a number of major markets the convention is to quote
yields semi-annually (see compound interest: thus, for example, an annual effective yield of
10.25% would be quoted as 5.00%, because 1.05 x 1.05 = 1.1025).

The yield is usually quoted without making any allowance for tax paid by the investor on the
return, and is then known as "gross redemption yield". It also does not make any allowance for
the dealing costs incurred by the purchaser (or seller).

 If the yield to maturity for a bond is less than the bond's coupon rate, then the (clean)
market value of the bond is greater than the par value (and vice versa).
 If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
 If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
 If a bond's coupon rate is equal to its YTM, then the bond is selling at par.
Variants of yield to maturity

As some bonds have different characteristics, there are some variants of YTM:

 Yield to call: when a bond is callable (can be repurchased by the issuer before the maturity), the
market looks also to the Yield to call, which is the same calculation of the YTM, but assumes that
the bond will be called, so the cashflow is shortened.

 Yield to put: same as yield to call, but when the bond holder has the option to sell the bond back
to the issuer at a fixed price on specified date.

 Yield to worst: when a bond is callable, puttable, exchangeable, or has other features, the yield
to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.

[edit] Example

Consider a 30-year zero-coupon bond with a face value of $100. If the bond is priced at an
annual YTM of 10%, it will cost $5.73 today (the present value of this cash flow, 100/(1.1)30 =
5.73). Over the coming 30 years, the price will advance to $100, and the annualized return will
be 10%.

What happens in the meantime? Suppose that over the first 10 years of the holding period,
interest rates decline, and the yield-to-maturity on the bond falls to 7%. With 20 years remaining
to maturity, the price of the bond will be 100/1.0720, or $25.84. Even though the yield-to-
maturity for the remaining life of the bond is just 7%, and the yield-to-maturity bargained for
when the bond was purchased was only 10%, the return earned over the first 10 years is 16.25%.
This can be found by evaluating (1+i) from the equation (1+i)10 = (25.842/5.731), giving 1.1625.

Over the remaining 20 years of the bond, the annual rate earned is not 16.25%, but rather 7%.
This can be found by evaluating (1+i) from the equation (1+i)20 = 100/25.84, giving 1.07. Over
the entire 30 year holding period, the original $5.73 invested increased to $100, so 10% per
annum was earned, irrespective of any interest rate changes in between.

Here is another example:

You buy ABC Company bond which matures in 1 year and has a 5% interest rate (coupon) and
has a par value of $100. You pay $90 for the bond.

The current yield is 5.56% ((5/90)*100).

If you hold the bond until maturity, ABC Company will pay you $5 as interest and $100 for the
matured bond.

Now for your $90 investment you made $105 and your yield to maturity is 16.67% [= (105/90)-
1] or [=(105-90)/90]

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