Bond Parameters
Yield Results
Understanding Yield to Maturity (YTM)
Yield to Maturity (YTM) is the total return anticipated on a bond if it is held until its maturity date. YTM is considered a long-term bond yield but is expressed as an annual rate. It factors in the bond's current market price, par value, coupon interest rate, and time to maturity.
YTM is a complex calculation because it assumes that all coupon payments are reinvested at the same rate as the bond's current yield. Because of this, it is often considered the most accurate measure of a bond's return.
Current Yield vs. YTM
While YTM accounts for the time value of money and the bond's eventual return to par value at maturity, the Current Yield is a simpler calculation. It measures the annual income (interest or dividends) divided by the current price of the security.
- Premium Bonds: When a bond is priced above its par value, the Current Yield will be higher than the YTM, as the investor will experience a capital loss when the bond matures at par.
- Discount Bonds: When a bond is priced below its par value, the YTM will be higher than the Current Yield, as the investor will experience a capital gain at maturity.
What is Yield to Call (YTC)?
Some bonds have a callable feature, allowing the issuer to redeem the bond before it matures, usually at a slight premium to par value. The Yield to Call (YTC) calculates the investor's yield assuming the bond is called at the earliest possible date.
Investors should look at both YTM and YTC, often focusing on the "Yield to Worst" (YTW)—which is simply the lower of the two yields—to understand their minimum expected return.