Yield to maturity is the total return an investor can expect to receive if a bond is held until its maturity date. It takes into account the bond’s purchase price, the interest payments and the amount repaid at maturity. Yield to maturity is therefore a comprehensive measure of the bond’s expected return.
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Yield to maturity helps investors compare the potential returns of different bonds.
When investors buy a bond, they typically receive regular interest payments, also known as coupons. At the end of the bond’s term, the issuer repays the bond’s face value. Yield to maturity combines these interest payments with the difference between the purchase price and the face value to calculate the overall return.
Because bonds can be bought above or below their face value, yield to maturity provides a more accurate picture of the expected return than simply looking at the coupon rate. Investors often use this measure to evaluate bonds with different prices and maturities.
Short example:
Suppose an investor buys a bond with a face value of €1,000 that pays 4 percent interest per year. The investor purchases the bond for €950 and plans to hold it until maturity.
Because the investor receives both the annual interest payments and the €1,000 repayment at maturity, the yield to maturity will be slightly higher than 4 percent.
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