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Information > Financial Terms > This page Yield to Call and Yield to
Maturity YIELD
TO CALL
The
discount rate that equates the present value of the guaranteed cash flow
(interest plus call price) if the bond is called. YIELD
TO MATURITY
Because
bonds and other obligations are contractual in nature, specifying promise
to pay principal at fixed future date and interest annually in the meantime,
yield to maturity is the proper calculation of annual return, because
it involves determination of the income elements as both the annual interest
income and either accretion (appreciation per year on straight-line basis
from discount cost price to full par at maturity, over remaining maturity)
or amortization (depreciation per year on straight-line basis from premium
cost price down to full par at maturity, over remaining maturity).
In mere current return on bonds, properly used for income bonds
(those whose interest payment is contingent upon earnings, and is not
fixed at precise rate as fixed charge) and sometimes for bonds subject
to great uncertainty of continuation of nominally fixed interest, the
only income element figured is the year's annual interest projected or
expected. As
an alternative to yield to maturity, it may be appropriate to calculate
yield to first call date, especially in the case of Yield
to maturity may be precisely determined mathematically, but the computation
may be complex and time-consuming, and so bond yield tables, in a wide
range of coupon rates, maturities, and prices, are available from publishers.
These are a great convenience in determining, with a minimum of
necessary interpolation, the precise yields resulting from the interplay
of the above variables. In
the absence of a convenient bond yield table, the formula for approximate
yield to maturity on a bond is basically the following:
(1) take annual interest payment, plus accretion (discount, or
aggregate dollar difference between cost price and full maturity value
of the bond, divided by remaining maturity) or minus amortization (premium,
or aggregate dollar difference between cost price and full maturity value
of the bond, divided by remaining maturity); (2) divide by a simple average
of cost price and full maturity value.
Thus, if a bond is bought at 80 ($800 per $1,000 bond) pays 4%
interest annually, and has 10 years' remaining maturity at the time of
purchase, the approximate yield to maturity is 6.67% (interest of $40
annually, plus annual accretion of $20, divided by average principal of
$900). BIBLIOGRAPHY
FINANCIAL
PUBLISHING Co. Comprehensive Bond Values Tables. |