Running Head: Yield to Maturity

Yield to Maturity

Von Stanley Gossi

University of Phoenix

Ena Wu

May 10, 2010

Yield to Maturity

What is yield to maturity?

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short (Investopedia, 2010, para. 1).

Easiest way to understand yield to maturity… A perfect example to understand yield to maturity is from Stock Jargon website, (2010), “if you paid $100 and purchased a $110 par value bond that matures in 1 year and pays an annual $10 coupon, your total return would be $20 ($10 from the value of the bond going up, $10 from the coupon payment). Thus, your yield-to-maturity would be 20%” (para. 2).
Yield to maturity formula

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(Block & Hirt, 2005)

Yield to maturity formula at work… An example taken from Foundations of Financial Management by Block & Hirt (2005); “Assume a 15-year bond pays $110 per year (11 percent) in interest and $1,000 after 15 years in principal repayment. The current price of the bond is $932.21. We wish to compute the yield to maturity…”

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The corporation had issued bonds at $110, and the current price of the bond is $932.21. At this current price, the ongoing yield to maturity increased to 12 percent (11.94 percent, using the approximation method).
Conclusion
Yield to maturity is pretty easy concept to understand after looking at different examples and how the formula works. Yield to maturity is an important concept to understand because “it also indicates the current cost of to the