YTM vs Current Yield
Yield to maturity or YTM and Current yield are terms that are associated more with bonds. It is not that hard to differentiate the two. The terms themselves show that they are different. The Yield to Maturity is the yield when a bond becomes mature, while the Current yield is the yield of a bond at the present moment.
The Current yield is used to make an assessment on the relationship between the current price of bonds and the annual interest generated by bonds. The YTM is an anticipated rate of the return associated with bonds. The Current Yield is the actual yield an investor would get.
The YTM can be called as the rate of return a person will receive for the bond until its maturity. If a bond is bought at a discount of the face value, the YTM would be higher than that of the Current Yield as the discount raises the yield. On the other hand, if a premium is paid for the bond, the YTM will be less to the current yield.
Unlike the YTM, the current yield refers to the yield at the current moment and will not show the total return of the bond. The Current Yield also does not take into account the reinvestment risks.
The Yield to maturity is determined by using several key elements. The current Yield is one such key element in determining YTM. The other determining elements include current market price and the Par Value. Current Yield can be calculated by dividing the annual payment by the price.
When the yield to maturity determines the total return on the investment, the Current yield does not show that.
Summary:
1. The Current yield is used to make an assessment on the relationship between the current price of bonds and the annual interest generated by bonds. The YTM is an anticipated rate of the return associated with bonds.
2. The yield to maturity determines the total return on the investment, the Current yield does not show that.
3. If a bond is bought at a discount of the face value, the YTM would be higher than that of the Current Yield as the discount raises the yield. On the other hand, if a premium is paid for the bond, the YTM will be less to the current yield.
4. The Current Yield also does not take into account the reinvestment risks.