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Trading and Investment Terminology

Yield to Maturity

YTD measures the annual return an investor would receive if he or she held a particular bond until maturity.

 

It is also known as redemption yield. As the name suggests, if an investment is held till its maturity date, the rate of return that it will generate will be Yield to Maturity.

 

It is the speculative rate of return or interest rate of fixed-rate security, such as a bond.

Key Factors:

  1. Current Market Price
  2. Par-Value
  3. Coupon Interest Rate
  4. Time to maturity

 

For example, 

let's assume you own a Company XYZ bond with a $1,000 par value and a 5% coupon that matures in three years. If this Company XYZ bond is selling for $980 today on the market, using the formula above we can calculate that the YTM is 2.87%.

                     YTM = (C + (F - P) / n) / ((F + P) / 2)

  • P = price of the bond
  • n = number of periods
  • C = coupon payment
  • r = required rate of return on this investment
  • F = maturity value
  • t = period when payment is to be received

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