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Yield to maturity

 
Investment Dictionary: Yield To Maturity - YTM

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 Says:
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.

Related Links:
Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration. Advanced Bond Concepts
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Financial & Investment Dictionary: Yield to Maturity (YTM)
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Concept used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its Maturity Date. It takes into account purchase price, Redemption value, time to maturity, Coupon yield, and the time between interest payments. Recognizing time value of money, it is the Discount Rate at which the Present Value of all future payments would equal the present price of the bond, also known as Internal Rate of Return . It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also called a bond yield table) or can be determined using a programmable calculator equipped for bond mathematics calculations. See also Duration; Horizon Analysis; Yield to Average Life; Yield to Call.

Banking Dictionary: Yield to Maturity
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Annualized percentage return of a bond held until its stated maturity. This is a commonly accepted method of comparing yields on bonds with different coupon interest rates, because it assumes that interest income will be reinvested at the current yield and it takes into account any adjustments for bond premium or discount. For this reason it differs from Current Yield, which may be higher or lower.

Yield to maturity quotes may also differ from an investor's actual return at maturity because they assume constant reinvestment of interest at the currently quoted yield. This may or may not be accurate if the bonds are sold at prices above, or below, their face value, or Par Value. For easy reference, the yield to maturity of a given bond can be found in the bond tables prepared by financial publishers. Certain types of programmable calculators can also be used to compute yield to maturity. Also called effective rate of return. See also Bond Equivalent Yield; Duration; Yield to Average Life; Yield to Call.

Real Estate Dictionary: Yield to Maturity (YTM)
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The Internal Rate of Return on an investment. Considers all inflows and outflows of investment returns and their timing. Contrast with Current Yield.
Example: An income-producing property requires a $10,000 investment. It promises a $1,000 annual return for 5 years, then resale proceeds of $15,000. The yield to maturity is 17.1%. See Internal Rate of Return for formulas.

Law Dictionary: Yield to Maturity
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A calculation of yield on a bond that takes into account the capital gain on a discount bond or capital loss on a premium bond. In the case of a discount bond, the yield-to-maturity (YTM) is higher than the current yield or the coupon yield. The reverse is true for a premium bond with YTM lower than both current yield and coupon yield. See yield.

Wikipedia: Yield to maturity
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Contents

Example

Consider a 30-year zero-coupon bond with a face value of $100. If the bond is priced at an (annual) yield-to-maturity 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 $25.84 (100/(1.07^20). 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) = (25.842/5.731)0.1 = 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) = (100/25.84)0.05 = 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 running yield is 5.56% (5/90*100).

If you hold the bond until maturity, ABC Company will give 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)

See also

References

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Investment Dictionary. Copyright ©2000, Investopedia.com - Owned and Operated by Investopedia Inc. All rights reserved.  Read more
Financial & Investment Dictionary. Dictionary of Finance and Investment Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.  Read more
Banking Dictionary. Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.  Read more
Real Estate Dictionary. Dictionary of Real Estate Terms. Copyright © 2004 by Barron's Educational Series, Inc. All rights reserved.  Read more
Law Dictionary. Law Dictionary. Copyright © 2003 by Barron's Educational Series, Inc. All rights reserved.  Read more
Wikipedia. This article is licensed under the Creative Commons Attribution/Share-Alike License. It uses material from the Wikipedia article "Yield to maturity" Read more