Yield To Maturity vs Current Yield: Difference and Comparison

The yield to maturity and current yield are two methods used to calculate a specific bond yield using formulas.

Both these methods, which are the current yield and yield to maturity, have different applications to be used, depending on an investor’s specific goal.

It is not hard to differentiate both these terms as their names show their application and characteristic.

Key Takeaways

  1. Yield to maturity measures the total return on investment, considering the bond’s interest rate and price fluctuations.
  2. Current yield measures the annual return of a bond based solely on its annual coupon payment and market price.
  3. Yield to maturity assumes the bond is held until maturity, while current yield does not consider the bond’s maturity date.

Yield To Maturity vs Current Yield

Yield to maturity is expecting the complete return of the amount of money to the investor when the bond reaches its maturity or due date considering the price rate of bond at that time and other features as well. Current Yield revolves around the amount of money return focusing on the total percentage of annual interests and current market price of bond.

Yield To Maturity vs Current Yield

The yield to maturity is the yield when a specific bond turns mature. The yield to maturity is also called the return rate a person will receive when the bond attains maturity.

The yield to maturity is assumed to be known as a bond-related rate of return. This yield is determined using a variety of crucial elements.

The current yield is the yield a person who invests would get after investing money. The current yield is essentially the bond that is available at the present moment.

This measure denotes a specific bond’s current market value price rather than its actual par value or nominal value. An investor who expects to earn after investing when the owner has purchased a particular bond is known as the current yield.

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Comparison Table

Parameters of comparisonYield To MaturityCurrent Yield
Primary function.Evaluate the return of return investing in a bond till the date of a bond’s maturity.Estimates and forecasts a relationship between the current price of a bond and the interest rate generated by a bond annually.
Rate for discounting The Yield to maturity rate would be higher when a bond is bought for a discount that a person receives. The current yield rate would be comparatively low when a bond is bought for a discount received by a person.
Premium rateThe yield-to-maturity rate would be low when a certain premium is paid for a bond.The current yield rate would be higher when a
certain premium is paid for a bond.
Risks takenThe Yield to maturity takes into account the reinvestment risk.
The Current yield does not take into account the reinvestment risks.
CoverageThe yield of maturity is far-reaching and widely used.The current yield does not have a far-reaching impact.
FormulaThe formula for yield to maturity: The formula for current yield: Coupon rate upon the Purchase price.

What is Yield To Maturity?

The term yield to maturity is the total return determined for a bond when a specific bond is kept on hold until it matures. This type of bond is considered a long-term one expressed as an annual rate.

All the payments made under this yield are scheduled and reinvested on the same date. Yield to maturity is also called a book yield or a redemption yield.

The yield to maturity is widely used and has a far-reaching impact. The rate equated by the current flow with the present value of future outflows according to the current market price of a bond is known we yield to maturity.

This yield for the bond is assumed to be known as a bond-related rate of return. This yield is determined using a variety of critical elements.

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What is the Current Yield?

The current yield is the income generated from an investment by the current price of specific security kept on hold. This measure states the current price of the bond rather than a bond’s nominal value.

An investor who expects to earn after investing when the owner has purchased a particular bond is known as the current yield.

Although it is not stated as a current yield, if a person holds the bond until maturity and gets an actual return for the investment, the current yield is said to have a better measure than a nominal yield.

It is because it measures the rate of return concerning the recent present price of a specific bond.

Main Differences Between Yield To Maturity and Current Yield

  1. The current yield is used to forecast or evaluate the relationship between the current ongoing price of a bond and the interest generated annually by a bond. In contrast, the yield to maturity is the estimated rate associated with the bond return, which is kept on hold till the maturity of the bond.
  2. The yield to maturity directs the total return on the investment, whereas the current yield does not.
  3.  The Yield to maturity would be higher when a bond is purchased at a received discount, whereas the current yield would be comparatively low when a bond is purchased at a received discount.
  4.  The yield to maturity will be flat when a certain premium is paid for a bond, whereas the current yield will be higher when a certain premium is paid for a bond.
  5.  The Yield to maturity considers the risk of reinvesting, whereas the Current yield does not consider the reinvestment risks.
References
  1. https://jwm.pm-research.com/content/17/2/31.short
  2. https://www.researchgate.net/profile/Bill_Yang2/publication/263257602_Yield_to_maturity_and_total_rate_of_return_A_theoretical_note/links/56fc083d08aef6d10d91b910.pdf

Last Updated : 11 June, 2023

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18 thoughts on “Yield To Maturity vs Current Yield: Difference and Comparison”

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