Yield to Maturity

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Summary

What is Yield to Maturity? Meaning.

Yield to Maturity (YTM) is the annual rate of return anticipated on a bond that a bondholder buying a bond today and holding it to maturity would receive on his investment. YTM takes into account the total of annual interests payments (coupon yield) , the purchase price, the Redemption Value, the amount of time (number of years) remaining until maturity, and the time between interest payments. Recognizing the Time Value of Money, the technique is used to determine the rate of return an investor will receive if a long term, interest-bearing  investment is held to its Maturity Date. An approximate YTM can be found by using a bond yield table.


YTM is equal to the discount rate at which the Present Value of all future payments would equal the present price of the bond, also known as the Internal Rate of Return.

 

Using Bond Insurance, investors can protect themselves against economical loss in the event of payment default of the issuer, in return for paying a specified premium to a third party, usually an insurance company. The premium will provide interest and capital repayments as specified in the bond policy.


Note that it is assumed in the YTM rate, that the coupons are reinvested at the YTM rate. This may or may not be accurate, if the bonds are sold at prices above, or below, their Face Value or Par Value.


Also called Maturity Yield and Effective Rate of Return.


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Compare with: Maturity Date  |  Redemption Value  |  Face Value  |  Net Present Value

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