# Yield to maturity

﻿
Yield to maturity

The Yield to maturity (YTM) or redemption yield is the yield promised to the bondholder on the assumption that the bond or other fixed-interest security such as gilts will be held to maturity, that all coupon and principal payments will be made and coupon payments are reinvested at the bond's promised yield at the same rate as invested. It is a measure of the return of the bond. This technique in theory allows investors to calculate the fair value of different financial instruments. The YTM is almost always given in terms of annual effective rate.

The calculation of YTM is identical to the calculation of internal rate of return.

* If a bond's current yield is less than its YTM, then the bond is selling at a discount.
* If a bond's current yield is more than its YTM, then the bond is selling at a premium.
* If a bond's current yield is equal to its YTM, then the bond is selling at par.

Variants of Yield to maturity

Given that many bonds have different characteristics, there are some variants of YTM:

* Yield to Call: when a bond is callable (can be repurchased by the issuer before the maturity), the market looks also to the Yield to Call, which is the same calculation of the YTM, but assumes that the bond will be called, so the cashflow is shortened.

* Yield to Put: same as Yield to Call, but when the bond holder has the option to sell the bond back to the issuer at a fixed price on specified date.

* Yield to Worst: when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of Yield to Maturity, Yield to Call, Yield to Put, and others.

Example

Consider a 30-year zero coupon bond with a face value of \$100. If the bond is priced at a 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%.

But 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. 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 16.26%. This can be found by evaluating (1+i) = (25.84/5.73)0.1 = 1.1626.

Over the remaining 20 years of the bond, the annual rate earned is not 16.26%, but 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 matured to \$100, so 10% annually was made, irrespective of interest rate changes in between.

ee also

*Bond Valuation — Yield To Maturity
*Dividend yield
*Bond duration
*Coupon rate

Wikimedia Foundation. 2010.

### Look at other dictionaries:

• yield-to-maturity — ( YTM) The annual percentage yield of a security calculated in a specific manner. The yield to maturity is the single discount rate that, when applied to all future interest and principal payments, produces a net present value equal to the… …   Financial and business terms

• yield to maturity — n. The return that an investor will receive from a bond held until it matures. The Essential Law Dictionary. Sphinx Publishing, An imprint of Sourcebooks, Inc. Amy Hackney Blackwell. 2008 …   Law dictionary

• yield to maturity — The rate of return an investor receives if a fixed income security is held to maturity. Chicago Board of Trade glossary The percentage rate of return paid on a bond, note, or other fixed income security ( fixed income securities) if the investor… …   Financial and business terms

• Yield to maturity — The percentage rate of return paid on a bond, note or other fixed income security if you buy and hold it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It assumes that… …   Financial and business terms

• yield to maturity — noun a) The internal rate of return on a bond held to maturity, assuming scheduled payment of principal and interest. b) A calculation of yield on a bond that takes into account the capital gain or loss on a discount bond or capital loss on a… …   Wiktionary

• yield to maturity — pelningumas iki išpirkimo statusas T sritis turto vertinimas apibrėžtis Metinė iki išpirkimo dienos išlaikytos obligacijos grąžos norma, atsižvelgiant į esamą rinkos kainą, jos nominaliąją vertę, atkarpos palūkanų normą ir iki išpirkimo likusį… …   Lithuanian dictionary (lietuvių žodynas)

• yield to maturity — the total rate of return to an owner holding a bond to maturity expressed as a percentage of cost * * * Finance. the rate of return on a bond expressed as a percentage that accounts for the difference between the interest earned based on current… …   Useful english dictionary

• yield to maturity — Finance. the rate of return on a bond expressed as a percentage that accounts for the difference between the interest earned based on current market value and that earned if the bond is held to maturity. Also called maturity yield. * * * …   Universalium

• yield to maturity — /ˌji:ld tə mə tjυərɪti/ noun a calculation of the yield on a fixed interest investment, assuming it is bought at a certain price and held to maturity …   Dictionary of banking and finance

• Yield to maturity —   The internal rate of return yielded by a financial instrument held to maturity …   International financial encyclopaedia