BAJAJ BROKING

Notification
No new Notification messages
Ather Energy IPO is Open!
Apply for the Ather Energy IPO through UPI in just minutes.
Open a Free Demat Account
Pay ZERO maintenance charges for the first year, get free stock picks daily, and more.
Trade Now, Pay Later with up to 4x
Never miss a good trading opportunity due to low funds with our MTF feature.
Track Market Movers Instantly
Stay updated with real-time data. Get insights at your fingertips.

Yield To Maturity Explained

Listen to our Podcast: Grow your wealth and keep it secure.

0:00 / 0:00

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held till the time it matures. In other words, YTM is the rate of return that an investor would receive if they bought a bond at its current market price and held it until the bond’s maturity date, receiving all interest payments and the principal repayment.

What is Yield to Maturity in Bonds (YTM)?

Yield to maturity (YTM) is the total return anticipated on a bond if it is held until maturity. It represents the average annual return earned by an investor who purchases a bond at its current market price and holds it until maturity, collecting all interest and principal payments due.

Bond YTM takes into account the bond’s coupon rate, the purchase price of the bond, the time remaining until maturity, and the face value of the bond. It is expressed as an annual percentage rate and is a key measure used by investors to compare the expected return of different bonds.

YTM assumes that all coupon payments are reinvested at the same rate until the bond matures and that the bond issuer will fulfil its obligation to pay both interest and principal at maturity. However, YTM is a theoretical calculation and does not account for factors such as changes in interest rates or credit risk that may affect the actual return of a bond investment.

Additional Read: Maturity Date

How to Calculate Yield to Maturity (YTM)?

Although one may find a YTM calculator on the internet. But it is equally important to understand the YTM formula. The YTM calculation involves estimating the present value of all future cash flows from a bond, including interest payments and the return of principal at maturity. The YTM formula is as follows:

YTM = [(C + (F-P)/n) / ((F+P)/2)] x 100%

Where:

C = annual coupon payment

F = face value of the bond

P = purchase price of the bond

n = years until maturity

Example

Suppose an investor purchases a bond with a face value of Rs 1,000, a coupon rate of 5%, and 10 years remaining until maturity, at a price of Rs 900. The YTM can be calculated as follows:

YTM = [(50 + (1000-900)/10) / ((1000+900)/2)] x 100%

YTM = 6.85%

Therefore, the expected annual return on this bond is 6.85%.

Advantages of Yield to Maturity

  • Comprehensive measure of expected return: YTM takes into account all future cash flows, including coupon payments and principal repayment, and provides a more accurate estimate of expected return than just looking at the coupon rate.
  • Facilitates comparison between different bonds: YTM allows investors to compare the expected returns of different bonds, even if they have different coupon rates, face values, and maturities.
  • Useful for bond pricing: YTM can be used to calculate the fair value of a bond, which is helpful for making investment decisions.

Disadvantages of Yield to Maturity (YTM)

  • Assumes a constant interest rate: YTM assumes that interest rates remain constant over the life of the bond, which may not be the case in practice. If interest rates change, the YTM may no longer accurately reflect the expected return on the bond.
  • Ignores reinvestment risk: YTM assumes that all coupon payments are reinvested at the same rate as the YTM, which may not be realistic in practice. Reinvestment risk arises from the uncertainty of future reinvestment rates.
  • Ignores credit risk: YTM assumes that the issuer will fulfill all of its obligations under the bond contract, which may not be the case if the issuer defaults.
  • Limited to fixed-rate bonds: YTM is most useful for analyzing fixed-rate bonds. It may not be appropriate for bonds with variable coupon rates or complex cash flows.
  • May not be suitable for short-term bonds: YTM is designed for analyzing long-term bonds with many years until maturity. It may not be suitable for short-term bonds with a maturity of less than one year.

Final Thought

In conclusion, Yield to Maturity (YTM) is an important measure for investors to consider when analysing bond investments. It takes into account all future cash flows and provides a comprehensive estimate of expected return, facilitating comparison between different bonds. However, it is important to note that YTM has its limitations, such as assuming a constant interest rate, ignoring reinvestment risk, and credit risk. Ultimately, investors should use YTM as a tool, alongside other factors such as creditworthiness and market conditions, to make informed investment decisions.

Disclaimer: Investments in securities markets are subject to market risks, read all the related documents carefully before investing.

Share this article: 

Read More Blogs

Disclaimer :

The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes.

The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.

Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.

BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.

Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

[ Read More ]

For more disclaimer, check here : https://www.bajajbroking.in/disclaimer

Our Secure Trading Platforms

Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading

Bajaj Broking App Download

9.5 lakh+ Users

icon-with-text

4+ App Rating

icon-with-text

4 Languages

icon-with-text

₹4400+ Cr MTF Book

icon-with-text