Difference Between Bond Yield and Yield to Maturity (With Table)

Bond Yield and Yield to Maturity sound quite similar but are different in real life. Despite coming from the background of yield in a bond structure, both the terms differ a lot. Bond Yield and Yield to Maturity are two different aspects of a bond issued to a bondholder.

Bond Yield vs Yield to Maturity

The difference between bond yield and yield to maturity is that yield to maturity is the extended version of bond yield. Bond Yield is the sum of interest payments and dividend payments, calculated annually. In short, a bond yield shows the annual income of investment, whereas yield to maturity is the total predicted yield on a bond till its date of maturation.

Bond Yield, or commonly known as yield, designates the revenue return on the bond. In short, a bond yield is calculated by dividing coupon amount(interest) by the price. This shows that a bond yield is proportional to the price. If the price changes, the Yield of the bond changes too.

Yield to maturity comes into effect when the bond grows mature. It is considered a more extensive method for calculating the return of debt and is also known as redemption/book yield. The yield to maturity compares or equates the present cash flows of the bond to the regular market price.

Comparison Table Between Bond Yield and Yield to Maturity

Parameters of ComparisonBond YieldYield to Maturity
DenotationBond Yield, or commonly known as yield, designates the revenue return on the bond. In short, a bond yield is calculated by dividing coupon amount(interest) by the price.Yield to maturity comes into effect when the bond grows mature. It is considered a more extensive method for calculating debt return and is also known as redemption/book yield.
Relation with Coupon amountIt is directly proportional to the coupon amount and increases with an increase in it.It is indirectly proportional to the coupon rate of a bond. If the YTM of a bond is less than its coupon rate, it is sold at a premium. If the YTM of a bond is more than its coupon rate, it sells at a discount. Similarly, if the YTM of a bond equals the coupon rate, the bond sells at standard.
Relation with PriceBond Yield is inversely proportional to the price of a bond.Yield to maturity is the predicted return rate on a bond and depends on the coupon rate.
Formula Bond Yield is calculated as (Coupon rate of the bond/ Price of the bond) Yield to maturity is calculated by the formula: [(Face value/Present value)1/Time period]-1.
Market ValueIt clearly shows a bond’s current value in the market.Yield to maturity is the expected return rate that is calculated annually.

What is Bond Yield?

Bond Yield, also known as Yield, defines the return rate of a bond. When digging more into this term, bond yield accounts for the time rate of money and compound interest returns. To understand the Yield on a bond simply, one can divide the coupon amount by the face value upon maturity.

Bond Yield is indirectly proportional to the price. As the price increases, the yield falls or vice-versa. When a bond is issued, the bondholder entrusts some money to the issuer. The bond issuer then pays the interest on the bond till the time it is in operation. Upon maturity, the face value of the bond begins working.

For example, a bondholder buys a bond at $1000 with a coupon of 10%. If the bondholder holds the bond for the successive 10 years, they will be paid 100 dollars each year by the issuer for the successive 10 years. At the end of the duration, the bondholder will get 1000 dollars from the issuer. The bond yield stands at 10% on the scheduled date and can be calculated by the formula: (Coupon amount/Price).

What is Yield to Maturity?

Yield to Maturity, also known as book yield/redemption, signifies the predictable rate of return earned by the bondholder yearly. To anticipate the yield to maturity, the bond is needed to be held till its maturity. It helps in comparing the present cash flow of the bond to the regular market price.

It is indirectly proportional to a bond’s coupon interest. To be sold at a premium, the yield to maturity of a bond should be less than its coupon rate, and to sell the bond at a discount, the yield to maturity should be more than its’s coupon rate. Similarly, if the YTM of a bond equals the coupon rate, the bond sells at standard.

There are three variants in YTM, depending upon the type of bond. In a yield to call(YTC), the bond can be purchased again before its date of maturity by the issuer. Yield to put(YTP) is similar to YTC. The only difference is that in a YTP, the bondholder can sell back the bond to the issuer on a given date. In the case of yield to worst(YTW), a bond can be callable, puttable, interchangeable at the same time.

Main Differences Between Bond Yield and Yield to Maturity

  1. Bond yield designates the revenue return on the bond. Yield to Maturity is a more extensive method for calculating the return of the debt.
  2. The bond yield is directly proportional to the coupon rate, whereas the yield of maturity is inversely proportional to the coupon amount.
  3. Yield to maturity is the predicted rate of return on a bond, calculated annually, but the bond yield is inversely dependent on the price of the bond.
  4. Bond Yield is calculated by the formula: (Coupon interest/ The given price of the bond), whereas yield to maturity is calculated by the formula: [(Bond’s Face value/Present value of the bond)1/Time period]-1.
  5. Bond yield shows the current market value of the bonds, but Yield to maturity reveals the annually expected return rate on a bond.

Conclusion

Bond Yield and Yield to Maturity(YTM) are some of the terms linked with a bond. Bond yield is the ratio of annual interest rate to a bond’s current value, whereas Yield to Maturity(YTM) compares the present cash flow and the expected future interest payment.
In other words, bond yield is the actual return but yield to maturity points towards the anticipated return annually. Bond Yield is calculated by the formula: (Coupon interest/ Given Price) and Yield to Maturity is calculated by the formula: [(Bond’s face value/Present value of the bond)1/Time period]-1.

References

  1. https://www.jstor.org/stable/2326906
x
2D vs 3D