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Foundations of Finance: Bonds and the Term Structure of Interest Rates 3 B. Yield to Maturity (YTM) Definition Yield to Maturity (YTM) is the constant interest rate (discount rate) that makes the present value of the bond’s cash flows equal to its price. YTM is sometimes referred to as the Internal Rate of Return (IRR). Example
1 INTRODUCTION TO BONDS 1 Description 4 Outline of market participants 6 Bond analysis 8 Financial arithmetic: the time value of money 8 Present value and discounting 9 Discount factors and boot-strapping the discount function 15 Bond pricing and yield: the traditional approach 18 Bond pricing 18 Bond yield 23 Accrued interest 30
There are three types of bond yields: current yield, yield to maturity, and in some cases, yield to call Current yield is the annual return on the dollar amount paid for the bond and is derived by dividing the bond’s interest payment by its price Yield to maturity is the total return received by holding the
Calculate various measures of bond yield. Read bond and stock quotations. Value a preference stock. Calculate the value of a stock using the dividend discount model and the P/E ratio approach. Show the relationship between E/P ratio, expected return, and growth.
A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Usually, bonds are considered to be those debt securities with terms to maturity of over 1 year.
To determine the value of a bond at a particular point in time, we need to know the number of periods remaining until maturity, the face value, the coupon, and the market interest rate for bonds with similar features. The interest rate required in the market on a bond is called the bond’s yield to maturity (YTM).
A bond’s yield is the return an investor expects to receive each year over its term to maturity. For the investor who has purchased the bond, the bond yield is a summary of the overall return that accounts for the remaining interest payments and principal they will receive, relative to the price of the bond. For an issuer of a bond, the bond ...
