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The yield to maturity represents the promised yield on a bond
The yield to maturity represents the promised yield on a bond
A yield to maturity is the internal rate of return on a bond held to maturity, assuming scheduled payment of principal and interest.
Yield to maturity assumes that the bond is held up to the maturity date. This is a disadvantage. If the bond is a yield to call , it can be called prior to the maturity date. Thus, the ivestor should sell the callable bond prior to maturity if he expects that he will earn higer return by doing so (in other words when yeild to call is higher than held to maturity).
"Yield" or "YTM" ("Yield to Maturity")
Yield to maturity means the interest rate for which the present value of the bond's payments equals the price. It's considered as the bond's internal rate of return. Yield to. call is a measure of the yield of a bond, to be held until its call date.
Yield usually refers to yield to maturity. If a bond is trading at par it usually means the yield to maturity is equal to the coupon.
The promised yield to maturity calculation assumes
as yield to maturity increases the bonds price decreases, because a higher yield to maturity means its riskier to investors
increase
Current yield is equal to the annual interest payment divided by the market price. It is the actual yield an investor will receive (instead of what is stated). For example, if a bond has a stated rate of 5 percent, but is selling below par, the investor would receive more than a 5 percent return. If the bond is selling above par, the current yield is actually less than 5 percent. Yield to maturity is the total return an investor will receive if the security is held until the maturity date, which is all of the annual interest payments and the difference between the original price and the principal you will receive at maturity. This formula is much more complicated but there are websites that will do it for you. Try moneychimp.com which has a calculator for the current yield and YTM.
Compute the current price of the bond if percent yield to maturity is 7%