This method is not widely used as it does not take into account the cash flows. Both these bond yields have their own functions application, and they should be used according to the characteristics they prevail. Skip to content The yield to maturity and current yield are two methods used to calculate a specific bond yield using formulas. Estimates and forecasts a relationship between the present price of a bond and the interest rate generated by a bond annually.
The Yield to maturity rate would be higher when a bond is bought for a discount that a person receives. The current yield rate would be comparatively low when a bond is bought for a discount received by a person.
The yield to maturity rate would be low when a certain premium is paid for a bond. The Yield to maturity takes into account the reinvestment risk.
The coupon rate is like fixed income security for governments in which the issuer of the bond receives the annual interest payments. So, when investing Rs.
The yield to maturity is the return rate that investors hold while holding the bond until maturity. The yield to maturity becomes relevant only when an investor purchases the bond from the secondary market. The major difference between coupon rate and yield of maturity is that coupon rate has fixed bond tenure throughout the year. However, in the case of the yield of maturity, it changes depending on several factors like remaining years till maturity and the current price at which the bond is being traded.
The above example shows the inverse relationship between yield to maturity and the price of the bond. The purpose of this distinction between coupon rate and yield of maturity is to clear the terms for those who have some or limited experience in the financial industry.
Yield to maturity or YTM and Current yield are terms that are associated more with bonds. It is not that hard to differentiate the two. The terms themselves show that they are different. The Yield to Maturity is the yield when a bond becomes mature, while the Current yield is the yield of a bond at the present moment.
The Current yield is used to make an assessment on the relationship between the current price of bonds and the annual interest generated by bonds. The YTM is an anticipated rate of the return associated with bonds. The Current Yield is the actual yield an investor would get.
The YTM can be called as the rate of return a person will receive for the bond until its maturity. If a bond is bought at a discount of the face value, the YTM would be higher than that of the Current Yield as the discount raises the yield.
A current yield is the interest rate paid to the bondholder at the current period. The current yield does not reflect the value of holding the bond till its maturity. Current yield is calculated by dividing the annual cash flows by the market price; therefore, fluctuation in the market prices will greatly affect the current yield of a bond.
The calculation of the YTM is more complicated than the current yield as it involves a number of variables such as par value of the bond, its coupon rate, market price and maturity date.
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