What is yield-to-maturity in debt mutual funds?

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. In other words, it is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity, with all payments made as scheduled and reinvested at the same rate.

What happens if YTM increases?

Without calculations: When the YTM increases, the price of the bond decreases. Without calculations: When the YTM decreases, the price of the bond increases. Again, Bond A has a higher interest rate risk, because of a higher duration. If all else remains the same, then the duration must decrease.

What is yield-to-maturity and why is it important?

The primary importance of yield to maturity is the fact that it enables investors to draw comparisons between different securities and the returns they can expect from each. It is critical for determining which securities to add to their portfolios.

Is a higher or lower YTM better?

The low-yield bond is better for the investor who wants a virtually risk-free asset, or one who is hedging a mixed portfolio by keeping a portion of it in a low-risk asset. The high-yield bond is better for the investor who is willing to accept a degree of risk in return for a higher return.

What effects yield to maturity?

If an investor purchases a bond at par or face value, the yield to maturity is equal to its coupon rate. If the investor purchases the bond at a discount, its yield to maturity will be higher than its coupon rate. A bond purchased at a premium will have a yield to maturity that is lower than its coupon rate.

What is yield to maturity how it is calculated?

YTM = the discount rate at which all the present value of bond future cash flows equals its current price. One can calculate yield to maturity only through trial and error methods. If the bond is selling at a premium (above par value), then the coupon rate is higher than the interest rate.

What is the difference between current yield and yield to maturity?

A bond’s current yield is an investment’s annual income, including both interest payments and dividends payments, which are then divided by the current price of the security. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until its maturation date.

Can Yield to Maturity be negative?

For the YTM to be negative, a premium bond has to sell for a price so far above par that all its future coupon payments could not sufficiently outweigh the initial investment. For example, the bond in the above example has a YTM of 16.207\%. If it sold for $1,650 instead, its YTM goes negative and plummets to -4.354\%.

Can yield to maturity be negative?