Bond Yield and Yield to Maturity sound quite similar but are different in real life. Despite coming from the background of yield in a bond structure, both the terms differ a lot. Bond Yield and Yield to Maturity are two different aspects of a bond issued to a bondholder.
Main Differences Between Bond Yield and Yield to Maturity
- Bond yield designates the revenue return on the bond. Yield to Maturity is a more extensive method for calculating the return of the debt.
- The bond yield is directly proportional to the coupon rate, whereas the yield of maturity is inversely proportional to the coupon amount.
- Yield to maturity is the predicted rate of return on a bond, calculated annually, but the bond yield is inversely dependent on the price of the bond.
- Bond Yield is calculated by the formula: (Coupon interest/ The given price of the bond), whereas yield to maturity is calculated by the formula: [(Bond’s Face value/Present value of the bond)1/Time period]-1.
- Bond yield shows the current market value of the bonds, but Yield to maturity reveals the annually expected return rate on a bond.
Conclusion
Bond Yield and Yield to Maturity(YTM) are some of the terms linked with a bond. Bond yield is the ratio of annual interest rate to a bond’s current value, whereas Yield to Maturity(YTM) compares the present cash flow and the expected future interest payment.
In other words, bond yield is the actual return but yield to maturity points towards the anticipated return annually. Bond Yield is calculated by the formula: (Coupon interest/ Given Price) and Yield to Maturity is calculated by the formula: [(Bond’s face value/Present value of the bond)1/Time period]-1.
References
- https://www.jstor.org/stable/2326906