Yield to Maturity
Yield to Maturity (YTM) or redemption yield of a bond is the rate of return an investor will receive on their investment once a bond reaches its maturity date.
The yield of a bond is the amount an investor earns on a security, over the specified period of the bonds life. This amount is made up of the interest or dividend earned on security, and is usually expressed as a percentage of the face value or the current market value of this security; paid out on an annual basis.
Finding the YTM of a security is an intricate process and the following factors must be taken into account:
- Current Market Price
- Par Value
- Coupon Interest Rate
- Time to maturity
While the calculation is complex, the following formula may be used to find out its approximate value:
Where: C – Interest/coupon payment
- FV – Face value is the nominal or face value of a security or coupon as indicated on a security’s certificate. It is a fixed value determined at the time of issuance and unlike market value, it doesn’t fluctuate on a regular basis
- PV – Present value/price of the security
- t – The amount of time it takes the security to reach maturity