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  • A Few Notes On YTM

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    1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate. 2) If interim cash flows are not reinvested at the YTM rate, the actual realized yield will be lower than the YTM. 3) For an investor to realize the full YTM, interim cash flows like coupon payments must be able to be reinvested at the same rate as the YTM for the full duration of the bond.

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    1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate. 2) If interim cash flows are not reinvested at the YTM rate, the actual realized yield will be lower than the YTM. 3) For an investor to realize the full YTM, interim cash flows like coupon payments must be able to be reinvested at the same rate as the YTM for the full duration of the bond.

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    5 views6 pages

    A Few Notes On YTM

    Uploaded by

    sanchi
    1) For a bond's yield to maturity (YTM) to be realized, the bond must be held to maturity and all interim cash flows must be reinvested at the YTM rate. 2) If interim cash flows are not reinvested at the YTM rate, the actual realized yield will be lower than the YTM. 3) For an investor to realize the full YTM, interim cash flows like coupon payments must be able to be reinvested at the same rate as the YTM for the full duration of the bond.

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    A few notes on YTM

    • A few points about YTM


    1) You hold the bond to maturity
    2) All interim cash flows are reinvested at
    the interest rate that solves for the
    computed YTM.
    8% reinvested for 25 years
    7100 end of wealth value

    4100 interest on interest

    2000 coupon payments

    1000 Principal return


    1000

    Without reinvestment you end up with 3000 !!!


    • This means 1000 = 3000
    • (1 +i) 25

    • i = 4.5% this is the realized yield


    • People suffer from yield illusion
    • Again just to be clear– Suppose a 20 year
    bond has a 15% YTM

    • WE would realize this only if we were able


    to reinvest all coupons at 15% for 20 years
    • Question to think about – if this could be
    done –How long would it take to recover
    the cost ( price ) of the bond?

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