Yield to Maturity (YTM)
Candlefocus EditorYTM takes into account the total amount of interest payments made throughout the duration of the bond, which are referred to as coupon payments. In addition, it also takes into account the difference between the bond’s face value and its purchase price - the discount or premium. The higher the YTM, the more attractive the bond investment is.
Investors can calculate a bond’s YTM using a variety of methods, such as the present valueof payments method or the coupon rate-YTD method. The present value of payments method relies on the present value of all payments over the life of the bond. It discounts each payment using the bond’s yield and takes into account the face value and any premiums paid. The coupon rate-YTD method uses the bond’s coupon rate, yield to date and the face value to calculate YTM.
Since calculating YTM can be a complicated process, investors can also use an online bond calculator to quickly and accurately estimate a bond’s YTM. This can be a helpful tool for investors who are trying to compare different bond investments.
When comparing bonds, investors should consider both the current yield of a bond and its YTM. The current yield of a bond measures what rate of return an investor will realize on the amount of money invested into the bond, and this rate changes constantly. On the other hand, YTM measures what rate of return an investor will have earned when their bond matures, and this rate remains constant.
In conclusion, YTM is a key metric used by investors to evaluate how attractive an investment in a bond may be. It is a measure of the total rate of return that an investor will realize when the bond matures, taking into account all coupon payment and the face value of the bond. Investors should be sure to compare the current yield of a bond to its YTM when making investment decisions.