What is a Yield to Maturity?

Malcolm Tatum
Malcolm Tatum

The yield to maturity is the anticipated rate of return associated with a given bond. Essentially, it is possible to calculate this number by assuming that the bondholder will choose to retain control of the investment all the way to the maturity date. Often listed in financial reports as YTM, it is determined using a simple formula in conjunction with essential bits of information about the bond.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Often, when the matter under discussion is the yield to maturity of a bond, the matter will simply be referred to as the yield. There are several key elements that are involved in determining a yield, but one of the foundational components is the current yield on the market price. This fixed income amount helps to anchor the calculation so that it will have some relevance in the task of making a projection of future revenue generation.

Along with the current market price, the par value and rate of coupon interest will also influence the accurate assessment of the yield to maturity on the bond issue. These elements are also considered to be stable, and help to make it easier to ascertain the projected rate of return when the intent is to hang on to the bond until the original date of maturity.

When considering all the basic elements related to the calculating a yield to maturity, is it often assumed that all coupons on the bond issue will be reinvested at the same rate. For a general idea of the yield of a given bond issue, it is usually acceptable to use a standardized bond yield table. It should be noted that the factors involved in calculating a more precise figure can become quite complex, however, and may require a certain amount of trial and error as different scenarios are ran. Today, many financial analysts prefer to calculate it with the use of software programs that can instantly consider several variables and provide a range of possible yields based on slightly different interest rates and market prices.

Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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