Thorough Description of Yield to Maturity?
Yield to maturity (YTM) is the total rate of return that will have been earned by a bond when it makes all interest payments and repays the original principal. YTM is essentially a bond’s internal rate of return (IRR) if held to maturity.
What is yield to maturity and why is it important?
Yield to maturity (YTM) is an important concept for debt capital markets. The YTM for a bond implies the total return from the bond when held till maturity and includes both coupon and principal payments. There are two key concepts in realizing the exact return as the YTM: 1.
What is yield to maturity equation?
In the case of a Bond, YTM is defined as the total rate of return that a Bond Holder expects to earn if a Bond is held till maturity. The YTM formula for a single Bond is: Yield to Maturity = [Annual Interest + {(FV-Price)/Maturity}] / [(FV+Price)/2]
What factors determine yield to maturity?
Yields and Bond Prices are inversely related. So a rise in price will decrease the yield and a fall in the bond price will increase the yield. The calculation for YTM is based on the coupon rate, the length of time to maturity and the market price of the bond. YTM is basically the Internal Rate of Return on the bond.
What happens if YTM increases?
Without calculations: When the YTM increases, the price of the bond decreases. Without calculations: When the YTM decreases, the price of the bond increases. (Note that you don’t need calculations for this price, because the YTM is equal to the coupon rate). to a change in the interest rate (YTM).
Is a high YTM good?
Key Takeaways. The bond’s rating tells you the degree of risk that the company issuing it will default on its obligations. The lower the rating, the higher the yield will be. The higher the rating, the safer your money will be.
What is the difference between YTM and interest rate?
Key Takeaways. Yield is the annual net profit that an investor earns on an investment. The interest rate is the percentage charged by a lender for a loan.
What is the definition of yield to maturity quizlet?
yield to maturity (YTM) the rate of return of an investment in a bond that is held to its maturity date, or the discount rate that sets the present value of the promised bond payments equal to the current market price of the bond.