The practice of allocating resources, mainly money, with the expectation of gaining a profit later. One can make their investment by starting a business or by purchasing an asset, and whatsoever, gain or loss is the ultimate solution of the initial investment. Over and above, bond yield is the return one expects in a bond.
Yield to Maturity vs Rate of Return
The main difference between Yield of Maturity and Rate of Return is that the yield of maturity determines the investment over its entire life. While the latter determines the measure of the investors’ interest in the bond. Besides, the return on bonds at any given period will hugely affect the yield to maturity of bonds.
Yield to maturity is also known as a bond’s book yield or redemption yield. It is the estimation of the internal rate of return that is held until it matures. Additionally, it is the internal rate of return of an investment in a bond only if the investor holds the bond until it matures, following the scheduled payments and reinvestment at the same rate.
On the contrary, the rate of return is defined as the overall gain or loss of a person’s investment over a particularised period. Moreover, it is the annual percentage of profit earned on an investment, with this note assists one to understand the power of investing in a particular asset.
Comparison Table Between Yield to Maturity and Rate of Return
| Parameters of Comparison | Yield to Maturity | Rate of Return |
| Definition | Yield to maturity is a single interest rate to investors at current market prices, assuming that interest is paid and held till maturity. In other words, YTM is also a markdown value of a bond, where all future cash inflows are given to the investor as the current price of a bond if the bond is held till maturity. | The rate of return is a sum of profit or loss attained by an investor on the given investment over a fixed period of time or till maturity. The rate of return is applicable to any ilk of assets, bonds, real estates and stocks etc. |
| Risk factor | In any case, the investor may sway the investment when the yield to maturity is less than expected another investment. | Market risk makes an impact on the rate of return. Where, if the market price is high, then the investor would be the beneficiary. But if the market price of assets is low, then the investors are at a loss. Moreover, when capital is at a loss makes a risk to ROR. |
| Calculated | Yield to maturity= the number of years to maturity root of (face value/current price – 1) | Rate of Return= the investment’s current value – its initial value) divided by the initial value; all times 100 |
| Variations | There are three different types of YTM to measure the bond value by- Yield to call, yield to put, and Yield to worst. | There are four types of return rates: money-weighted return, external flows, IRR, logarithm return, ordinary return, arithmetic average return, and annualized return. |
| Interest | The yield to maturity is a single interest rate or internal rate of return. It is the sum of future cash inflows that are equal to the bond’s market price at present. IRR is the interest rate that excludes external factors. | The rate of return is an interest paid by an investor on the assets on installment or as a whole sum until the assets get possessed by the owner. |
| Other names | Yield to maturity is also called Redemption yield and bond yield. | Rate of Return is also known as – The total return, capital return, annualized return, and net return. |
What is Yield to Maturity?
Furthermore, yield to maturity is defined as the investment’s internal rate of return earned by the investor; that is, the buyer of today at the marketplace will charge that the bond will be held until its maturity, with payments and coupons made on schedule. Additionally, it also determines the annual percentage rate of investment in the market convention. And compares the bonds that have different maturities and coupons.
Yield to maturity concerns until your bond is matured, with all coupons and principal payments on schedule. It is also named book yield or redemption yield. The function of a yield to maturity occurs by dividing the annual cash inflows from a bond by the marketplace, eventually determining the amount of money to be invested on holding as well as buying a bond for one year. In simple terms, it helps one to perceive the price of a bond from the market with the present value of all cash flows in the future.
The formula to calculate the yield to maturity of a discount bond is the number of years to maturity root of (face value/current price – 1). Here the face value is the bond’s maturity value, while the current price is the bond’s price at present.
What is the Rate to Return?
Rate to return is used to measure the net gain or loss of an investment over a determined period. In other words, it is signified as the rate of the investment’s paydown cost. The rate of return indicates the percentage change from the beginning of the period until the end of your investment.
It is applied on assets, stocks, real estate, art, and even on a bond. The conversion from return into a return over some time of a standard length is termed as the rate of return. The rate of return is extrapolated based on a single period and after combined.
In such a case, the rate of return of a single period of any length of time is calculated by the ratio of the difference of final(inclusive dividends and interest) and initial value to that of the initial value. Moreover, it keeps tabs on the investor’s investments, such as interest payments, coupons, cash dividends, stock dividends, structured products, and so on.
Main Differences Between Yield to Maturity and Rate of Return
- Yield to maturity is a single interest rate of return on a bond or debenture, whereas the Rate of return is a net return, either profit or loss, attained from an investor on the investment.
- Yield to maturity or bond-yield sum is given to the beneficiary, assuming that the interest or coupon payments have been paid timely and the bond is held till the maturity. On the other hand, the rate of return will be given to the beneficiary only when the investment gets maturity or interest has been paid.
- Yield to maturity is calculated as a discount bond is the number of years to maturity root of (face value/current price – 1). Besides, the rate of the return value is evaluated as the current price of investment (Minus) Initial value of the investment (whole divide)by Initial value and 100 times multiply.
- Yield to maturity is named as Book yield and redemption yield. Albeit Rate of Return is also termed as Capital value, the net return and annualized return.
- Yield to maturity is an internal rate of return that excludes external risk and is given as future cash inflows at the current market price. While for the rate of return, interest is estimated as the payment made on installment.
- The risk of Yield to maturity depends on competitors’ investment when the investor plans to sway because of less return than expected. Whereas, Rate of return risk depends on the market price and capital.
Conclusion
Yield to maturity is like a bond yield given to the investor at a current market price on the basis of an internal rate of return, assuming interest or coupon payments have been scheduled and the bond held till maturity. Yield to maturity is at stake if the investor sways their investment if the return is low than expected. Rate of return is a total value of profit or loss attained by the investor on the investment he/she made such as assets, real estates, bonds or stock, etc. in simple terms, the sum of investment is received by the investor on the investment he/she has been paying on installment. The rate of return will be at risk if the market price and capital value are at a loss.
References
- https://www.jstor.org/stable/2326906
- https://www.jstor.org/stable/1924568