Running Head: Yield to Maturity
Yield to Maturity
Von Stanley Gossi
University of Phoenix
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 ...view middle of the document...
The current price of the bond is $932.21. We wish to compute the yield to maturity…”
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).
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 corporation to issue bonds . If the corporate treasurer were to issue new bonds today, he or she would have to respond to the current market-demanded rate rather than the initial yield. Only by understanding how investors value bonds in the marketplace can the corporate financial officer properly assess the cost of that source of financing to the corporation” (Block and Hirt, 2005).
Block, S., & Hirt, G. (2005). Foundation of financial management, 11e. Retrieved from. https://ecampus.phoenix.edu/cvontent/eBookLibrary2/content/eReader.aspx
Investopedia. (2010). Yield to maturity. Retrieved from http://www.investopedia.com/terms/y/yieldtomaturity.asp
Stock Jargon. (2010). Yield to maturity. Retrieved from http://www.stockjargon.com/dictionary/y/yieldtomaturity.html