Yield to Maturity (YTM)
Definition
The yield to maturity of a bond or other investment is the internal rate of return arising from the cashflows of the investment. This is the same as the yield necessary to discount all the investment’s cashflows to a net present value (NPV) equal to its current dirty price. For a given set of cashflows, the yield to maturity can vary slightly according to which bond basis convention is used.
How is it used?
Suppose that I place £100 on deposit for 1 year and receive back £110 at the end of a year. It is fairly clear that I have earned a return (or ‘yield’) of 10% on this investment. If, however, I place £100 on deposit for 3 years, and receive back £10 after 1 year, £12 after 2 years and £114 after 3 years ...
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