What is Yield-to-maturity (YTM)?


What is Yieldtomaturity YTM?

Yield to maturity (YTM) is the rate of return anticipated on a bond when it is held until the maturity date. The YTM account for the interest payments already made and any discount or premium paid.

How to calculate Yieldtomaturity YTM?

To calculate a bond’s yield to maturity, enter the bond’s face value, its coupon rate, the number of years to maturity, the current price and the required rate of return.

See related articles on what is yield spread and how does it affect your investments? here, or this article regarding what is the yield curve?.

What are the benefits of Yieldtomaturity YTM?

Yield to maturity (YTM) is the percentage rate of return paid on a bond, assuming that the investor holds the bond until it matures and reinvests all coupons at the YTM rate. YTM measures both the current yield and capital gain of a bond. The current yield only considers coupon payments, while YTM also factors in the price appreciation of the bond. Generally, bonds with longer terms to maturity will have higher YTMs than bonds with shorter terms to maturity.

There are several benefits of using YTM to calculate the rate of return on a bond investment:

-It accounts for both coupon payments and price appreciation, giving a more accurate measure of return.
-It is easy to calculate using freely available online tools.
-It can be used to compare different bonds, even if they have different coupon rates or maturities.

What are the risks of Yieldtomaturity YTM?

Yield to maturity is the total return expected on a bond if it is held until the maturity date. The yield to maturity takes into account the interest that has accrued on the bond since it was issued, as well as any discount or premium at which the bond was originally sold.

However, there are a few risks to be aware of when considering YTM:

-Interest rate risk: If interest rates rise after you purchase a bond, the market value of your bond will fall. This is because bonds with lower yields are less attractive to investors.

-Credit risk: This is the risk that the issuer of the bond will not be able to make the interest payments or repay the principal when it becomes due. This could happen if the issuer experiences financial difficulties.

-Reinvestment risk: This is the risk that you will not be able to reinvest the money you receive from your bond at an interest rate that is as high as your current yield to maturity. This could happen if interest rates fall after you purchase your bond.

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