What are Yield to Maturity, Yield to Call, and Current Yield?

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Yield to Maturity

A bond's yield to maturity is the bond's overall rate of return, considering both incomes from interests and any capital loss or gain. YTM is the internal rate of return of the bond. It is assumed in the case of YTM that an investor will buy the bond and hold it until it gains maturity value, and all interests and coupon payments have been made in a pre-assigned manner.

Approximated YTM

The YTM considered above gives an approximate value. To get the real YTM, investors should use the trial and error process to find the best match of price with given security of equal value.

YTM Calculation

$$ YTM = \frac{𝐶 + \frac{FV − PV}{𝑡}}{\frac{FV + PV}{2}}$$

Where,

  • PV – Present value/price of the security

  • t – How many years it takes the security to reach maturity

  • C – Interest/coupon payment

  • FV – Face value of the security

Based on compounding, the YTM shows how much a security should yield on maturity. The calculations are based on dividend payment and not on compound interest.

Yield to Call

Many bonds have buy-back or call options attached to them. These bonds may be called back by the issuer upon their own discretion. These bonds may be redeemed or called before maturity. The calculation of yield to call bond's value is done in a similar manner as that of yield to maturity. However, the period and call value may differ from each other.

Yield to call is the ROI of a callable bond if the bonds is held for a given period which is before maturity. The YTC resembles P/E ratio in many senses, except that P/E is used for security and YTC is used in the case of bonds.

Current Yield

Current yield is a bond's yearly income divided by the current price of the bond. In the current yield, the market rate is more important than the face value. It means the return an investor would expect by holding the bond for a year.

$$ Current\:Yield = \frac{Annual\:Cash Inflows}{Market\:Price}$$

Note − Current Yield is applied to bonds that are issued depending on market rate rather than the face value of the bond at par.

raja
Published on 18-Aug-2021 12:11:42
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