Unlike the current yield, the yield to maturity (YTM) measures both current income and expected capital gains or losses. Furthermore, the current yield is a useless statistic for zero-coupon bonds. It is not a good measure of return for those looking for capital gains. Therefore, it is a useful return measure primarily for those who are most concerned with earning income from their portfolio. It completely ignores expected price changes (capital gains or losses). Note that the current yield only takes into account the expected interest payments. For the example bond, the current yield is 8.32%: There is no built-in function to calculate the current yield, so you must use this formula. The current yield is a measure of the income provided by the bond as a percentage of the current price: (You should be aware that intrinsic value and market price are two different, though related, concepts.) The Current Yield For the sake of simplicity, we will assume that the current market price of the bond is the same as the value. We found that the current value of the bond is $961.63. The bond has a face value of $1,000, a coupon rate of 8% per year paid semiannually, and three years to maturity. In the bond valuation tutorial, we used an example bond that we will use again here. We will discuss each of these in turn below. The expected rate of return on a bond can be described using any (or all) of three measures: If not, then you should first work through my HP 10B or HP 10BII tutorial. If you are comfortable using the TVM keys, then this will be a simple task. In this section we will see how to calculate the rate of return on a bond investment. We try to find assets that have the best combination of risk and return. One of the key variables in choosing any investment is the expected rate of return. Are you a student? Did you know that Amazon is offering 6 months of Amazon Prime - free two-day shipping, free movies, and other benefits - to students? Click here to learn more
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