Community Forex Questions
What is the difference between current yield and yield to maturity?
The difference between current yield and yield to maturity lies in the specific aspects they measure in relation to bonds.
Current yield refers to the annual interest income generated by a bond as a percentage of its current market price. It is a straightforward calculation that provides a snapshot of the bond's income potential at a given moment. For example, if a bond has an annual interest payment of $50 and its current market price is $1,000, the current yield would be 5% ($50 divided by $1,000).
On the other hand, yield to maturity (YTM) is a more comprehensive measure that considers the total return an investor would earn if they held the bond until maturity, factoring in both interest income and any capital gains or losses. YTM accounts for the bond's market price, coupon rate, time to maturity, and reinvestment assumptions. It takes into account the potential price appreciation or depreciation if the bond is purchased at a premium or discount to its face value.
In summary, while current yield provides a snapshot of a bond's current income potential, yield to maturity offers a more comprehensive estimate of the bond's overall return until maturity, accounting for price fluctuations and reinvestment assumptions.
Current yield refers to the annual interest income generated by a bond as a percentage of its current market price. It is a straightforward calculation that provides a snapshot of the bond's income potential at a given moment. For example, if a bond has an annual interest payment of $50 and its current market price is $1,000, the current yield would be 5% ($50 divided by $1,000).
On the other hand, yield to maturity (YTM) is a more comprehensive measure that considers the total return an investor would earn if they held the bond until maturity, factoring in both interest income and any capital gains or losses. YTM accounts for the bond's market price, coupon rate, time to maturity, and reinvestment assumptions. It takes into account the potential price appreciation or depreciation if the bond is purchased at a premium or discount to its face value.
In summary, while current yield provides a snapshot of a bond's current income potential, yield to maturity offers a more comprehensive estimate of the bond's overall return until maturity, accounting for price fluctuations and reinvestment assumptions.
Jun 26, 2023 13:20