What is Yield to Maturity (YTM)?
Yield to maturity is the yield you earn upon holding onto a security until its maturity, with respect to one such fixed-income asset – a bond or debenture. The YTM includes the amount paid as interest while also considering gains or losses incurred due to changes in the bond price.
Important Points:
Consideration of coupon payments: YTM considers the bond's regular yield payments and any possible cash gains or losses if kept until expiry.
YTM vs. current yield: YTM is a more complete way to measure return than current yield because it considers the value of money over time and the effect of reinvesting coupon payments.
Things that can change YTM: YTM can also vary with respect to interest rate movement, credit rating. As a result, rising yields to maturity (YTM) occur when the bond prices depreciate due to an upward shift in interest rates in the market. On the other hand, if interest rates fall, then the market value increases, and thus YTM goes down.
Considerations:
Risk and YTM: The YTM displays the value of earnings, but it does not consider all potential risks. When analyzing bonds, investors need to look for credit risk, interest rate risk, and the soundness of the issuers' financial health.
Callable Bonds: The YTM formula might need to consider call events where the owner can repay the bonds before they mature.
Investment strategy: YTM is especially useful for buy-and-hold buyers who want to hold on to the bond until it matures. Different types of investors may use other metrics for research. For example, investors who trade bonds on the secondary market may use different metrics.
Yield to maturity (YTM) is a crucial metric for bond buyers, providing a comprehensive measure of a bond's overall return potential. Unlike the current yield, which simply divides the annual coupon payment by the current market price, YTM considers the time value of money, the timing of coupon payments, and the bond's maturity date. This makes YTM a more accurate and reliable tool for comparing bonds with different maturities and coupon rates.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.