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• Yield to Maturity
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Outline of finance - Bond market
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** Yield to maturity
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Outline of finance - Discounted cash flow valuation
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**Yield to maturity
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Discounting - Discount factor
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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:
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Bond (finance) - Issuance
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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.
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Bond (finance) - Yield
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* 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.
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Bond (finance) - Bond valuation
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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
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Bond (finance) - Bond valuation
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.
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Yield (finance) - Bonds, notes, bills
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The 'yield to maturity' is the IRR on
the bond's cash flows: the purchase
price, the coupons received and the
principal at maturity.
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Yield (finance) - Preferred shares
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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.
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Relative valuation - Bonds
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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
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Cost of capital - Cost of debt
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The yield to maturity can be used
as an approximation of the cost
of debt.
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Corporate debt - Other risks in Corporate Bonds
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-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.
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United States Treasury security - Treasury bill
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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_glanc
e.htm Treasury Bills],
TreasuryDirect.gov
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Distressed securities - Distressed securities investment strategy
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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.
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Bond option - Valuation
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(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)
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Coupon (bond)
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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.
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Fisher equation
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
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I-spread
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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_asset
s/4503/v1n2_okane.pdf Credit Spreads
Explained]
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Yield elasticity of bond value
'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.
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Yield to maturity
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/yieldto
maturity.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
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Yield to maturity - Variants of yield to maturity
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* 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.
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Yield to maturity - Example 2
Now for your $90 investment, you get
$105, so your yield to maturity is 16.67%
[= (105/90)-1] or [=(105-90)/90].
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Mortgage yield - Application
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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 semiannually compounded yield to
maturity) and a conventional bond is
called the yield spread or I-spread.
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YTM
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'YTM' means yield to
maturity.
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Credit-linked note - Emerging Market CLN
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This in turn does not appropriately reflect
the Yield to Maturity of the underlying
asset as it approaches par value at
maturity
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Puttable bond
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.
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Sukuk - Controversy
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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