The yield to maturity and current yield are two methods used to calculate a specific bond yield using formulas. Both these methods that are the current yield and yield to maturity have their different applications to be used, which depend on an investor’s specific goal. It is not that hard to differentiate both these terms as their names themselves show their application and characteristic.
Yield To Maturity vs Current Yield
The main difference between yield to maturity and the current yield is that the current yield of a bond the rate of investment does on an annual basis, which includes paying dividends and interests. In contrast, the yield to maturity is the total return that is anticipated on a bond when this bond is made to be held till it gets matured.
The yield to maturity is that yield when a specific bond turns mature. The yield to maturity is also often called a return rate that a person will receive when the bond attains its maturity. The yield to maturity is usually assumed to be known as a bond-related rate of return. This yield is determined using a variety of crucial elements.
The current yield is the yield which a person who invests would get after investing money. The current yield is essentially the bond that is available at the present moment. This measure denotes the current market value price of a specific bond rather than its actual par value or nominal value. An investor who expects to earn after investing when the owner has purchased a particular bond is known as the current yield.
Comparison Table Between Yield To Maturity and Current Yield
| Parameters of comparison | Yield To Maturity | Current Yield |
| Primary function. | Evaluates the return of return investing in a bond till the date of maturity of a bond. | Estimates and forecasts a relationship between the present price of a bond and the interest rate generated by a bond annually. |
| Rate for discounting | The Yield to maturity rate would be higher when a bond is bought for a discount that a person receives. | The current yield rate would be comparatively low when a bond is bought for a discount received by a person. |
| Premium rate | The yield to maturity rate would be low when a certain premium is paid for a bond. | The current yield rate would be higher when a certain premium is paid for a bond. |
| Risks taken | The Yield to maturity takes into account the reinvestment risk. | The Current yield does not actually take into account the reinvestment risks. |
| Coverage | The yield of maturity is far-reaching and widely used. | The current yield does not have a far-reaching impact. |
| Formula | The formula for yield to maturity: | The formula for current yield: Coupon rate upon the Purchase price. |
What is Yield To Maturity?
The term yield to maturity is the total return determined for a bond when a specific bond is kept on hold until it matured. This type of bond is considered a long-term bond which is expressed as an annual rate. All the payments made under this yield are scheduled as well reinvested at the same date. Yield to maturity is also called a book yield or a redemption yield.
The yield to maturity is widely used and has a far-reaching impact. The rate equated by the current flow with the present value of future outflows according to the current market price of a bond is known we yield to maturity. This yield for the bond is usually assumed to be known as a bond-related rate of return. This yield is determined using a variety of critical elements.
What is Current Yield?
The current yield is stated as the income that is generated from an investment by the current price of specific security kept on hold. This measure states the price of the current price of the bond rather than a bond’s nominal value. An investor who expects to earn after investing when the owner has purchased a particular bond is known as the current yield.
Although it is not stated as a current yield, if a person holds the bond until maturity and gets an actual return for the investment made, the current yield is said to have a better measure than a nominal yield. It is because it measures the rate of return concerning the recent present price of a specific bond.
Main Differences Between Yield To Maturity and Current Yield
- The current yield is generally used to forecast or evaluate the relationship between the current ongoing price of a bond and the interest generated annually by a bond. In contrast, the yield to maturity is the estimated rate associated with the bond return, which is kept on hold till the maturity of the bond.
- The yield to maturity directs the total return on the investment made, whereas the current yield does not direct this.
- The Yield to maturity would be higher when a bond is purchased at received discount, where instead the current yield would be comparatively low when a bond is purchased at a received discount.
- The yield to maturity will be flat when a certain premium is paid for a bond, whereas the current yield would be higher when a certain premium is paid for a bond.
- The Yield to maturity considers the risk of reinvesting whereas, the Current yield does not consider the reinvestment risks.
Conclusion
The yield to maturity is more far-reaching and widely used for measuring the return calculations for debt security than a current yield. This method considers all the cash flow and rates of the equity from the par value of the bond that is anticipated in the market.
The current yield is a primary method used to calculate to return on a debt loan in which is bond is divided with the current market price and is expressed in terms of percentage. This method is not widely used as it does not take into account the cash flows. Both these bond yields have their own functions application, and they should be used according to the characteristics they prevail.
References
- https://jwm.pm-research.com/content/17/2/31.short
- https://www.researchgate.net/profile/Bill_Yang2/publication/263257602_Yield_to_maturity_and_total_rate_of_return_A_theoretical_note/links/56fc083d08aef6d10d91b910.pdf