Yield to maturity

Yield to maturity

Investors should be aware that yield to maturity can be affected by changes in interest rates. If interest rates go up, the price of a bond will usually go down, and the yield to maturity will increase. Conversely, if interest rates go down, the price of a bond will usually go up, and the yield to maturity will decrease.  

The yield to maturity is an important measure for bond investors, as it can give them an idea of the total return they can expect on their investment. It is also a useful tool for comparing different bonds. 

What is yield to maturity? 

Yield to maturity measures the total return on an investment in a bond expressed as a percentage of the bond’s current market price. The yield to maturity accounts for both interest paid on the bond since purchase and any potential capital profits or losses. 

Yield to maturity

Understand yield to maturity 

The rate of return an investor will receive if they keep a bond till it matures is known as yield to maturity. This rate takes into account the interest that the bond pays and any capital gains or losses that may occur as the bond’s price fluctuates. 

When understanding yield to maturity, there are a few factors to remember. First, the yield to maturity is different from the coupon rate. The interest the bond pays out annually is the coupon rate, but the yield to maturity accounts for both interest payments and price fluctuations. 

Second, the yield to maturity is a theoretical rate. An investor may not earn this exact rate if they sell the bond before it matures. Finally, the yield to maturity assumes that the bond will be held until it matures. The investor may receive a different rate of return if the bond is sold before it matures. 

How to calculate yield to maturity? 

Bond returns are measured by yield to maturity. It is calculated by taking the interest payments on the bond and dividing them by the bond’s purchase price.  

For example, if there’s a bond with a face value of 1,000 USD and an interest rate of 5%, the interest payments would be 50 USD per year. If the bond is purchased for 900 USD, the yield to maturity would be 5.56%. 

Uses of yield to maturity 

Yield to maturity can be used to compare different bonds with different coupon rates and lengths of time until maturity. It can also be used to compare bonds with different market prices. For example, a bond with a lower market price will have a higher yield to maturity than a bond with a higher market price. 

Bonds of various types can also be compared using yield to maturity. For example, a corporate bond usually has a higher yield to maturity than a government bond. This is because corporate bonds are considered riskier than government bonds. 

Finally, you may purchase or sell a bond based on the yield to maturity. It may be a good idea to buy a bond if the yield to maturity is greater than the current market yield since that indicates that the bond is undervalued. 

On the other hand, if the yield to maturity is lower than the current market yield, the bond is considered overvalued, and it may be a good time to sell the bond. 

Importance of yield to maturity 

Yield to maturity is an important concept for bond investors to understand because it provides a way to compare the potential return of different bonds. Yield to maturity considers the bond’s current market price, the coupon payments, and the length of time until the bond matures. This makes it a good way to compare bonds of different prices, coupon rates, and maturities.  

Remember that the yield to maturity is not the same as the current yield, which only looks at coupon payments. The yield to maturity also considers the bond’s price, which can fluctuate over time. This makes the yield to maturity a more accurate measure of the potential return on a bond.  

Frequently Asked Questions

Since the coupon rate has a set bond term for the whole year, this is the main distinction between the coupon rate and yield of maturity. The yield of maturity, on the other hand, varies according to different factors, including the number of years left until maturity and the current price for which the bond is sold. 

The yield to maturity rates of a bond moves inversely with its price. Investors will expect higher returns as interest rates climb. As a result, bond prices will decline, which will inevitably cause the yield-to-maturity rate to increase. 

The yield to maturity (YTM) is the total return expected from a bond if it is held until maturity. The coupon rate is simply the interest rate that the bond pays annually. The current yield is the YTM divided by the bond’s current market price.  

To calculate the YTM, one must first determine the bond’s price. The YTM takes into account the price of the bond, the coupon payments, and the time to maturity. The current yield does not consider the bond price, only the coupon payments and time to maturity.  

The YTM is always higher than the current yield because the current yield does not account for the bond’s price. The YTM is the most accurate measure of a bond’s return, while the current yield is a good measure of a bond’s interest rate. 

It is possible for a bond’s yield to call to be higher than its yield to maturity. This can happen if the bond is callable at a price below its par value, and the yield to call is calculated using this call price. In this case, the yield to call will be higher than the yield to maturity since the yield to maturity is calculated using the bond’s par value. 

To calculate yield to maturity on a trial error, determine the bond’s price using the trial and error method. Then, using the bond’s price and face value, calculate the yield to maturity. 

    Read the Latest Market Journal

    All-in-One Guide to Investing in China via ETFs

    Published on Feb 27, 2024 58 

    Start trading on POEMS! Open a free account here! Why China? In the vast landscape...

    Navigating the Post-Inflation Landscape in 2024: Top 10 US Markets Key Events to Look out for

    Published on Feb 23, 2024 99 

    Start trading on POEMS! Open a free account here! In 2023, the United States experienced...

    From Boom to Bust: Lessons from the Barings Bank Collapse

    Published on Feb 23, 2024 29 

    Barings Bank was one of the oldest merchant banks in England with a long history...

    Decoding FX CFD 2.0

    Published on Feb 20, 2024 63 

    This article is aimed at availing information and knowledge essential to intermediate forex traders. It...

    Weekly Updates 19/2/24 – 23/2/24

    Published on Feb 19, 2024 88 

    This weekly update is designed to help you stay informed and relate economic and company...

    Unlock Prosperity with 5 Sure-Fire Financial Instruments!

    Published on Feb 14, 2024 195 

    In Singapore, the concept of guaranteed returns may evoke the spirit of prosperity, reminiscent perhaps...

    Weekly Updates 12/2/24 –16/2/24

    Published on Feb 13, 2024 70 

    This weekly update is designed to help you stay informed and relate economic and company...

    Decoding FX CFD

    Published on Feb 7, 2024 98 

    The foreign exchange market commonly known as the forex or FX market, is a cornerstone...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com