Bond Yield to Maturity

If a bond holder decides to hold onto a bond they have purchased, they will typically want to know what the return on the investment will be over the entire life of the investment. The Current Yield indicates to the investor the return on the investment in the current period, based on the interest earned. The Yield to Maturity indicates the total return, including both interest earned and any change in the price over the holding period of the bond.

The Yield to Maturity calculates a series of present values. Each interest payment is discounted to today, as well as the future return of the face of the bond. For comparison purposes, the current yield is greater than the yield to maturity if the current price of the bond is greater than its face amount. If the face amount of the bond is greater than the current price, then the yield to maturity is greater than the current yield. The reason for this is quite simple, if the face value of a bond is $1,000 and the current price is $1,100, then you will be receiving LESS at the maturity of the bond than you would be paying right now, thus YIELDING less.

For those of you who want to know formulas:

YTM = sum of all discounted cash flows calculated as:

curr amt = Cash Flow / (1 + Interest)^time