Current Yield, Yield to Maturity (YTM), and Yield to Call (YTC) Current Yield: - Represents the current interest rate on a bond. - It is the return an i...
Current Yield:
Represents the current interest rate on a bond.
It is the return an investor expects to receive for investing in a bond for a specific term, typically to maturity.
It is important to compare current yields across different bonds with the same maturity because interest rates can fluctuate.
Yield to Maturity (YTM):
The YTM is the internal rate of return (IRR) of a bond.
It represents the expected rate of return for the investor over the entire life of the bond, including both the coupon payments and the maturity value.
The YTM is the discount rate that makes the present value of the future cash flows from the bond equal to the initial price.
Yield to Call (YTC):
A bond with a call provision gives the issuer the right to call the bond back before maturity at a predetermined price (known as the call premium).
The YTC is the discount rate at which the bond can be called back.
The investor receives the call premium if they exercise the call option.
Key Differences:
Current Yield: Instantaneous; reflects current market interest rates.
YTM: Represents the long-term return; reflects the investor's expected return over the entire life of the bond.
YTC: Time-sensitive; reflects the potential return if the bond is called back.
Examples:
A bond with a current yield of 3% is currently trading at a price of $1,000.
A bond with a YTM of 5% is offering a return of 5% per year.
A bond with a call provision priced at 12