BAJAJ BROKING
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.
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%.
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:
7th Pay Commission Leave Rules & Holidays in India
11 Dec, 2024 | 5 Min. read
Wipro Ltd
11 Dec, 2024 | 7 Min. read
Aditya Birla Group
11 Dec, 2024 | 10 Min. read
What is the Lock-in Period in IPO
11 Dec, 2024 | 6 Min. read
Textile Sector in India
11 Dec, 2024 | 11 Min. read
Step-by-Step Guide to Accessing Your Income Tax Assessment Order Online
11 Dec, 2024 | 3 Min. read
IPO vs FPO vs OFS: Key Differences in How Companies Raise Capital
11 Dec, 2024 | 8 Min. read
Gold Price in India - Gold Prices Edge Higher as Futures Hit $2,654.50
11 Dec, 2024 | 39 Min. read
Indian Overseas Bank Secures ₹1,359 Crore Income Tax Refund for AY 2015-16
11 Dec, 2024 | 2 Min. read
HG Infra Secures ₹899 Crore NH-227B Road Upgrade Project in UP
11 Dec, 2024 | 2 Min. read
NTPC Green Energy Secures 500 MW Solar Project with 250 MW ESS from SECI
11 Dec, 2024 | 2 Min. read
Awfis Space ₹583 Crore Block Deal Launches at ₹680 Floor Price
11 Dec, 2024 | 2 Min. read
RBI Launches ULI: Transforming Loan Access
August 27, 2024 | 4 Min. read
Textile Sector in India
September 20, 2024 | 5 Min. read
List of IPOs with DRHPs Filed
November 30, 2023 | 3 Min. read
Aditya Birla Group
September 28, 2023 | 10 Min. read
Bajaj Housing Finance Ltd IPO: Things Smart Investors Need to Know
September 05, 2024 | 4 Min. read
Budget Stock Ideas 2024-2025 | Stocks to Buy Today
July 24, 2024 | 4 Min. read
IPO Eligibility Criteria : Full Details
March 15, 2024 | 6 Min. read
What Is the Lock-In Period in IPOs?
October 18, 2023 | 6 Min. read
Godfrey Phillips Announces 2:1 Bonus Shares
September 16, 2024 | 7 Min. read
Jindal Group- A Comprehensive Analysis
September 27, 2024 | 7 Min. read
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading