• Yield to Maturity
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Outline of finance - Bond market
1 ** Yield to maturity
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Outline of finance - Discounted cash flow valuation
1 **Yield to maturity
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Discounting - Discount factor
1 In the case where the only discount rate you have is not a zero-rate (neither taken from a zero-coupon bond nor converted from a swap rate to a zero-rate through
Bootstrapping (finance)|bootstrapping) but an annually-compounded rate (for example
if your benchmark is a US Treasury bond with annual coupons and you only have its
yield to maturity, you would use an annually-compounded discount factor:
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Bond (finance) - Issuance
1 In contrast, government bonds are usually issued in an auction. In some cases both
members of the public and banks may bid for bonds. In other cases only market
makers may bid for bonds. The Yield to maturity|overall rate of return on the bond
depends on both the terms of the bond and the price paid. The terms of the bond, such as the coupon, are fixed in advance
and the price is determined by the market.
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Bond (finance) - Yield
1 * the yield to maturity or redemption yield, which is a more useful measure of the return of the bond, taking into
account the current market price, and the amount and timing of all
remaining coupon payments and of the repayment due on maturity. It is
equivalent to the internal rate of return of a bond.
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Bond (finance) - Bond valuation
1 The market price of a bond is the present value of all expected future interest and principal payments of the bond discounted at the bond's yield to maturity, or rate of return
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Bond (finance) - Bond valuation
1 The interest rate divided by the current price of the bond is called the
current yield (this is the nominal yield multiplied by the par value and divided by the price). There are other yield measures that exist such as the yield to first call, yield to worst, yield
to first par call, yield to put, cash flow yield and yield to maturity.
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Yield (finance) - Bonds, notes, bills
1 The 'yield to maturity' is the IRR on the bond's cash flows: the purchase price, the coupons received and the
principal at maturity.
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Yield (finance) - Preferred shares
1 If the preferred share has a maturity (not always) there can also be a yield
to maturity and 'yield to call' calculated, the same way as for
bonds.
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Relative valuation - Bonds
1 Here, the required return - technically the yield to maturity or YTM - on the bond is determined based on the bond's Credit rating relative to a government security
with similar maturity
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Cost of capital - Cost of debt
1 The yield to maturity can be used as an approximation of
the cost of debt.
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Corporate debt - Other risks in Corporate Bonds
1 -Interest Rate Risk. The level of Yields generally in a bond market, as
expressed by Government Bond Yields, may change and thus bring
about changes in the market value of Fixed-Coupon bonds so that their Yield to Maturity adjusts to newly
appropriate levels.
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United States Treasury security - Treasury bill
1 Like zero-coupon bonds, they do not pay interest prior to maturity; instead
they are sold at a discounting|discount of the par value to create a
positive yield to maturity.[http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm Treasury Bills], TreasuryDirect.gov
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Distressed securities - Distressed securities investment strategy
1 While there is no precise definition, fixed income security|fixed income instruments with a yield to maturity in excess of 1000
basis points over the risk-free rate of return (e.g. Treasury security|Treasuries) are
commonly thought of as being distressed. Distressed securities often carry ratings of
CCC or below from agencies such as Standard Poor's, Moody's Investors
Service|Moody's and Fitch Group|Fitch.
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Bond option - Valuation
1 (These calculations are performed using today's yield curve, as opposed to the bond's Yield to maturity|YTM.) The reason that the Black Model may
be applied in this way is that the numeraire is then $1 at the time of
delivery (whereas under Black–Scholes, the numeraire is $1 today)
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Coupon (bond)
1 The coupon rate is the yield that the bond pays on its issue date;
however, this yield can change as the value of the bond changes and
thus giving the bond's yield to maturity. Bonds having higher
coupon rates are therefore more desirable for investors than those
having lower coupon rates.
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Fisher equation
1 In finance, the Fisher equation is primarily used in Yield to maturity|YTM calculations of Bond (finance)|bonds or internal rate of return|IRR
calculations of investments
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I-spread
1 The 'Interpolated Spread' or 'I-spread' or 'ISPRD' is the difference
between the yield to maturity of the Bond (finance)|bond and the linearly
interpolated yield to the same maturity on an appropriate reference curve.[http://www.risk.net/digital_ass
ets/4503/v1n2_okane.pdf Credit Spreads Explained]
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Yield elasticity of bond value
1 'Yield elasticity of bond value' is the percentage change in bond value divided
by a one per percentage change in the yield to maturity of the bond. This is
equivalent to saying the derivative of value with respect to yield times the (interest
rate/value). This is equal to the MacAulay Bond Duration times the discount window|
discount rate, or the modified bond duration times the interest rate.
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Yield to maturity
1 The 'Yield to maturity' ('YTM'), 'book yield' or 'redemption yield' of a Bond (finance)|bond or other
security (finance)|fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until Maturity (finance)|maturity, and that all Coupon (bond)|
coupon and principal payments will be made on schedule.[http://www.investopedia.com/terms/y/yieldtomaturity.asp Definition of 'Yield To Maturity (YTM)'] Yield to maturity is simply the discount rate at which the sum
of all future cash flows from the bond (coupons and principal) is equal to the price of the bond
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Yield to maturity - Variants of yield to maturity
1 * Yield to worst: when a bond is callable, puttable, exchangeable, or has other features, the yield to worst
is the lowest yield of yield to maturity, yield to call, yield to put,
and others.
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Yield to maturity - Example 2
1 Now for your $90 investment, you get $105, so your yield to maturity is
16.67% [= (105/90)-1] or [=(105-90)/90].
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Mortgage yield - Application
1 Mortgage yields are primarily a tool for comparing mortgage bonds with conventional bonds. The difference
between the mortgage-backed bond's yield (generally converted to semi-annually compounded yield to maturity) and a conventional bond is called the yield spread or I-spread.
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YTM
1 'YTM' means yield to maturity.
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Credit-linked note - Emerging Market CLN
1 This in turn does not appropriately reflect the Yield to Maturity of the
underlying asset as it approaches par value at maturity
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Puttable bond
1 This type of bond protects investors: if interest rates rise after bond purchase,
the future value of coupon payments will become less valuable. Therefore,
investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate. Bondholders are ready to pay for such protection by accepting a lower yield to maturity|yield relative to
that of a straight bond.
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Sukuk - Controversy
1 However, his results on the comparison of yield to maturity of
sukuk and that of conventional bonds show that sukuk securities are
different from conventional bonds.
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