What is the Yield to Maturity?
The yield to maturity (YTM) of a bond is the rate of return a bond will generate for an investor if it is held to its maturity date. The yield to maturity formula takes into account interest payments and capital gains.
Mathematically, to calculate bond yield to maturity, we need to find the internal rate of return (IRR) of the bond if held to its maturity date. What this means is that if all the cash flows from the bond were discounted using the yield to maturity as the discount rate, then the present value of the cash flows would be equal to the price paid for the bond; or to put it another way, the net present value of all cash flows relating to the investment in the bond are zero.
The bonds YTM is also referred to as the redemption yield.
Additional information on the YTM can also be found at Wikipedia YTM.
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