Yield To Maturity Definition For Dummies

The yield curve is a graph that plots the relationship between yields to maturity and time to maturity for a group of bonds.

Yield to maturity definition for dummies. Yield to maturity and yield to call are two ways of measuring a bond s yield. Why does yield to maturity ytm matter. So for example if a 10 year treasury bond were currently yielding 2 percent to maturity you would expect 10 year corporate bonds to offer a yield to maturity of about 3 percent although the actual yield will vary to a large degree depending on the financial health and ratings of the company offering the bond and on market sentiment. Yield to maturity definition.

A bond s yield to maturity isn t as simple as one might think. Along the x axis of a yield to maturity graph we see the time to maturity for the associated bonds and along the y axis of the yield to maturity graph we see the yield to maturity for the associated bonds. It s a good idea to look up and understand each of these terms. Ytm allows investors to compare a bond s expected return with those of other securities.

A prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled mortgage payments until maturity. In other words it refers to the returns that a bond will fetch considering all payments made on time throughout the life of the bond. And as bond prices rise yields fall also helps investors anticipate the effects of market changes on their portfolios. The current yield of more than 5 2 because the investor is receiving cash of 2 500 every six months 5 000 per year on an investment of only 95 735.

Yield to maturity ytm otherwise referred to as redemption or book yield is the speculative rate of return or interest rate of a fixed rate security such as a bond. The investor s yield to maturity will be the market rate of 6 even though the bond s stated rate is 5 consisting of the following two components. An investor will determine a required yield the return on a bond. Yield to maturity ytm is the expected return on a bond that an investor will receive if it is held until the maturity date of the bond.

Yield to maturity is an important concept for all investors to know. Uses of yield to maturity ytm yield to maturity can be quite useful for estimating whether buying a bond is a good investment. The ytm is based on the belief or understanding that an investor purchases the security at the current market price and holds it until the security has matured. Read this article to get an in depth perspective on what yield to maturity is how its calculated and why its important.