Yield to Maturity (YTM)
The yield to maturity or buyback yield of a bond or other fixed-interest security, say for example gilts, is the internal rate of return (overall interest rate) gained by an investor who purchases the bond today at the market price, with assumption that the bond will be accommodated until maturity, and that all coupon and principal payments will be attained on schedule. Yield to maturity in reality, is an approximation of future return, as the rate at which coupon payments can be invest again when received is unknown. It allows investors to equate the merits of different financial tools. The yield to maturity often renders in terms of Annual Percentage Rate also known as A.P.R., but more under normal conditions market pattern is followed. A variety of major markets the convention is to quote generates semi annually.
The yield is generally quoted without attaining any margin for tax paid by the investor on the return. It is due to this reason referred as gross redemption yield. It does not make any margin for the dealing costs obtained by the purchaser or a seller.
Say if the yield to maturity for a bond is less than the bond's coupon rate, then the market value of the bond is more than the par value and vice verse. In case , if a coupon rate of a bond is less than its YTM then the bond is trading at a discount. Also if coupon rate of a bond is higher than its yield to maturity, then the bond is trading at a premium If a coupon rate of bond is equal to its yield to maturity, then the bond is selling at par.
Various forms of yield to maturity:
As some bonds have different features, there are some versions of yield to maturity:
a) Yield to call:
When a bond is due i.e it can be purchased again by the issuer before the maturity, the market appears also to the Yield to call. Yield to call is the similar computation but it presumes that the bond will be called, so the cash flow is reduced.
b) Yield to put:
It is similar to yield to call, but the only difference is that the bond holder has the choice to sell the bond back to issuer at a fixed price on assigned date.
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