Yield To Maturity

The investor expects an internal rate of return for the investment he made on bonds at the time of maturity. It is called as Yield to maturity. Bonds are usually bought at the market price. The factors that are taken into consideration while calculating Yield to maturity (YTM) are current market price of the bond, par value, coupon interest rate and time to maturity. Yield to maturity are usually calculated using bond yielding table.

The market value of bond depends mainly on two factors the yield to maturity and bond’s coupon rate. Bond’s coupon rate is the rate at which the bond issuer accepts to pay the bond holder.

The market price for the bond will be more if yield to maturity is more than that of bond’s coupon rate. There bond is said to be selling in three different criteria based on value of yield to maturity and bond’s coupon rate and they are premium, discount and par. The above three criteria help the investor in making decision on the purchase of the bond.

The bond is said to be selling at discount if bond’s coupon rate value is lesser than the value of the yield to maturity. The bond is said to be selling at premium if the coupon rate value is more than the value of yield to maturity. The bond is said to be selling at par if the value of coupon rate is same as that of yield to maturity.

The yield to maturity are calculated under two assumptions they are

• The investor holds the bond till it reaches its maturity period.
• The interest attained from bond is re invested back at the same rate as that of yield to maturity.

Thus Yield to maturity is used to compare one bond with other, thus yield to maturity is helpful as the comparison can be done between bonds with different par value, coupon interest rate etc. Yield to maturity do have some restriction as well, YTM cannot be used directly in callable bonds. Yield to maturity is more precise in determining the value of bond because yield to maturity take into account many factors unlike coupon rate.