Yield to Maturity

Yield to Maturity

In economics yield to maturity (Yield to Maturity : Definition ) is the internal rate of return from the flows of cash of fixed income security especially from bonds . Yield is paid if the bonds or other securities are to be held until their maturity . Yield to maturity is a measurement of the return from the bonds . Yield to maturity gives investors the opportunity to calculate the fair value of financial instruments . Yield to maturity applies exactly to a zero coupon bond . The reason is that this bond has no interest

to be reinvested . Yield to maturity assumes that all interests and dividends are reinvested . It takes also into account losses and gains in case of difference between the purchase and redemption price . Economists say that yield to maturity is a projection of future performance , because yield to maturity has to assume a reinvestment and the rate of yield to maturity itself . For example , as it is mentioned in the Yield to Maturity (2004 ) article , yield to maturity is an implicit function that can only be evaluated by the method of successive approximations . To achieve the quoted yield to maturity is easy when a zero coupon bond is to be help until maturity Yield to maturity is mostly quoted in terms of bond-equivalent yield (Yield to Maturity

For example , let 's consider a zero coupon bond that is 20 years . Its face value would be 100 . The bond would cost 5 .73 today if it is priced at a yield to maturity of 10 . The annualized return would be 10 over the twenty years , because the price would advance to 100 . Let 's suppose that during first 5 years the interest rates would decline . In the result the yield to maturity would fall to 9 . After 10 years of maturity the bond price would be 25 .84 . Nevertheless even in such situation the yield to maturity for bond would be just 9 . The bargained yield to maturity for the moment of bond buying was 10 , the earned return over the 10 years would be 16 .26 . But it doesn 't mean that the bond holder will earn 16 .26 annually over the remaining 10 years . His annual income would be only 9 . It will be found that over the 20 years period the annual return would be 10

References

Yield to Maturity : Definition (2005 . Retrieved August 26 , 2007 from HYPERLINK "http /www .investorwords .com /5370 /yield_to_maturity .html http /www .investorwords .com /5370 /yield_to_maturity .html

Yield to Maturity (2004 . Retrieved August 26 , 2007 , from HYPERLINK "http /www .moneychimp .com /articles /finworks /fmbondytm .htm HYPERLINK "http /wfhummel .cnchost .com /yield .html http /wfhummel .cnchost .com /yield .html

Bond Yield to Maturity (2006 . Retrieved August 26 , 2007 , from HYPERLINK "http /www .moneychimp .com /articles /finworks /fmbondytm .htm http /www .moneychimp .com /articles /finworks /fmbondytm .htm

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