yield to maturity

• Yield to Maturity

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Outline of finance - Bond market

1 ** Yield to maturity


Outline of finance - Discounted cash flow valuation

1 **Yield to maturity


Discounting - Discount factor

1 In the case where the only discount rate you have is not a zero-rate (neither taken from a zero-coupon bond nor converted from a swap rate to a zero-rate through

Bootstrapping (finance)|bootstrapping) but an annually-compounded rate (for example

if your benchmark is a US Treasury bond with annual coupons and you only have its

yield to maturity, you would use an annually-compounded discount factor:


Bond (finance) - Issuance

1 In contrast, government bonds are usually issued in an auction. In some cases both

members of the public and banks may bid for bonds. In other cases only market

makers may bid for bonds. The Yield to maturity|overall rate of return on the bond

depends on both the terms of the bond and the price paid. The terms of the bond, such as the coupon, are fixed in advance

and the price is determined by the market.


Bond (finance) - Yield

1 * the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into

account the current market price, and the amount and timing of all

remaining coupon payments and of the repayment due on maturity. It is

equivalent to the internal rate of return of a bond.


Bond (finance) - Bond valuation

1 The market price of a bond is the present value of all expected future interest and principal payments of the bond discounted at the bond's yield to maturity, or rate of return


Bond (finance) - Bond valuation

1 The interest rate divided by the current price of the bond is called the

current yield (this is the nominal yield multiplied by the par value and divided by the price). There are other yield measures that exist such as the yield to first call, yield to worst, yield

to first par call, yield to put, cash flow yield and yield to maturity.


Yield (finance) - Bonds, notes, bills

1 The 'yield to maturity' is the IRR on the bond's cash flows: the purchase price, the coupons received and the

principal at maturity.


Yield (finance) - Preferred shares

1 If the preferred share has a maturity (not always) there can also be a yield

to maturity and 'yield to call' calculated, the same way as for

bonds.


Relative valuation - Bonds

1 Here, the required return - technically the yield to maturity or YTM - on the bond is determined based on the bond's Credit rating relative to a government security

with similar maturity


Cost of capital - Cost of debt

1 The yield to maturity can be used as an approximation of

the cost of debt.


Corporate debt - Other risks in Corporate Bonds

1 -Interest Rate Risk. The level of Yields generally in a bond market, as

expressed by Government Bond Yields, may change and thus bring

about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly

appropriate levels.


United States Treasury security - Treasury bill

1 Like zero-coupon bonds, they do not pay interest prior to maturity; instead

they are sold at a discounting|discount of the par value to create a

positive yield to maturity.[http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm Treasury Bills], TreasuryDirect.gov


Distressed securities - Distressed securities investment strategy

1 While there is no precise definition, fixed income security|fixed income instruments with a yield to maturity in excess of 1000

basis points over the risk-free rate of return (e.g. Treasury security|Treasuries) are

commonly thought of as being distressed. Distressed securities often carry ratings of

CCC or below from agencies such as Standard Poor's, Moody's Investors

Service|Moody's and Fitch Group|Fitch.


Bond option - Valuation

1 (These calculations are performed using today's yield curve, as opposed to the bond's Yield to maturity|YTM.) The reason that the Black Model may

be applied in this way is that the numeraire is then $1 at the time of

delivery (whereas under Black–Scholes, the numeraire is $1 today)


Coupon (bond)

1 The coupon rate is the yield that the bond pays on its issue date;

however, this yield can change as the value of the bond changes and

thus giving the bond's yield to maturity. Bonds having higher

coupon rates are therefore more desirable for investors than those

having lower coupon rates.


Fisher equation

1 In finance, the Fisher equation is primarily used in Yield to maturity|YTM calculations of Bond (finance)|bonds or internal rate of return|IRR

calculations of investments


I-spread

1 The 'Interpolated Spread' or 'I-spread' or 'ISPRD' is the difference

between the yield to maturity of the Bond (finance)|bond and the linearly

interpolated yield to the same maturity on an appropriate reference curve.[http://www.risk.net/digital_ass

ets/4503/v1n2_okane.pdf Credit Spreads Explained]


Yield elasticity of bond value

1 'Yield elasticity of bond value' is the percentage change in bond value divided

by a one per percentage change in the yield to maturity of the bond. This is

equivalent to saying the derivative of value with respect to yield times the (interest

rate/value). This is equal to the MacAulay Bond Duration times the discount window|

discount rate, or the modified bond duration times the interest rate.


Yield to maturity

1 The 'Yield to maturity' ('YTM'), 'book yield' or 'redemption yield' of a Bond (finance)|bond or other

security (finance)|fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until Maturity (finance)|maturity, and that all Coupon (bond)|

coupon and principal payments will be made on schedule.[http://www.investopedia.com/terms/y/yieldtomaturity.asp Definition of 'Yield To Maturity (YTM)'] Yield to maturity is simply the discount rate at which the sum

of all future cash flows from the bond (coupons and principal) is equal to the price of the bond


Yield to maturity - Variants of yield to maturity

1 * 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.


Yield to maturity - Example 2

1 Now for your $90 investment, you get $105, so your yield to maturity is

16.67% [= (105/90)-1] or [=(105-90)/90].


Mortgage yield - Application

1 Mortgage yields are primarily a tool for comparing mortgage bonds with conventional bonds. The difference

between the mortgage-backed bond's yield (generally converted to semi-annually compounded yield to maturity) and a conventional bond is called the yield spread or I-spread.


YTM

1 'YTM' means yield to maturity.


Credit-linked note - Emerging Market CLN

1 This in turn does not appropriately reflect the Yield to Maturity of the

underlying asset as it approaches par value at maturity


Puttable bond

1 This type of bond protects investors: if interest rates rise after bond purchase,

the future value of coupon payments will become less valuable. Therefore,

investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate. Bondholders are ready to pay for such protection by accepting a lower yield to maturity|yield relative to

that of a straight bond.


Sukuk - Controversy

1 However, his results on the comparison of yield to maturity of

sukuk and that of conventional bonds show that sukuk securities are

different from conventional bonds.


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yield to maturity

Documents

bond finance yield

yield finance bonds

current yield

nominal yield

redemption yield

yield measures

bond finance bond valuation

bond market