Yield to Maturity
Yield to Maturity
MMPBL/503
University of Phoenix
Investing is a concept that had been around for years. One may believe it to be a legalized form of gambling. There are many different investment opportunities and investment instruments. An example is a bond. When you buy a bond, you are lending your money to a company or a government for a set period of time – anywhere from a year or less to as long as 30 years. When that time comes to an end, it is called the bond’s maturity date. On that date, the company or government that borrowed your money is supposed to pay it back in full. This amount is called the face value of the bond. (Investopedia.com, 2008). The market value of a bond can change after it is issued, so understanding the factors that can influence the value can be crucial in making informed financial decisions. By understanding the concept of Yield to Maturity it will be understood why when a bond purchased at a 10% bond could have a 9% yield to maturity.
Yield to maturity
Investopedia defines yield to maturity as the rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price value, coupon interest rate, and the time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as “yield” for short. (Invesopedia.com, 2008)
The concept of yield to maturity is synonymous with discount rate. It is the rate of return required by bond-holders. (Block & Hirt, 2005).
The ...