Yield to Maturity 2The yield to maturity is a measure of a bond’s realized value. Yield to maturity looks atthe interest rate in relation to the price, the purchase price in relation to the par value (face value)and the years remaining until maturity. It provides the most accurate representation of what a bond will return over a number of years. Investopedia describes the yield to maturity as “thereturn that an investor gains by receiving the present values of the coupon payments, the par value and capital gains in relation to the price that is paid” (Investopedia, 2007, ¶13) The yieldto maturity is greater than the current yield (nominal yield) if the bond is purchases at a discount.The yield to maturity is less than the current yield if the bond is purchased at a premium. Pleasereference the following commentary for additional information related to the abovementionedfactors and how they influence the yield to maturity.
Interest Rates and Purchase Price
In the given scenario the coworker purchased a 10% bond and was informed that it had a9% yield to maturity. Given this information, it is safe to assume that the coworker purchased the bond at a premium. When a bond is purchased at a premium, the nominal yield is a little higher than yield to maturity to compensate the investor for giving up the current use of the excessfunds.
The maturity of a bond is also influential in the assessing advantages of a bond’s valueand interest rate. In most instances if the bond has a shorter maturity the yield earned is not ashigh as a bond with a longer maturity date. This is primarily due to the fact inability of theinvestor to use his or her funds during the maturity period. According to the given variables this purchase is advantageous for the co worker.