Yield to Maturity vs Rate of Return: Difference and Comparison

The practice of allocating resources, mainly money, with the expectation of gaining a profit later. One can make their investment by starting a business or by purchasing an asset, and whatsoever gain or loss is the ultimate solution for the initial investment.

Over and above, bond yield is the return one expects in a bond. 

Key Takeaways

1. Yield to maturity refers to the total return anticipated on a bond if it is held until maturity. In contrast, the rate of return is the gain or loss of an investment over a specific period.
2. Yield to maturity considers the bond’s purchase price, par value, coupon rate, and time to maturity. In contrast, the rate of return calculates the percentage return on investment based on the initial cost.
3. Yield to maturity is used to calculate the return on fixed-income securities such as bonds, while the rate of return is used to assess the performance of any investment.

Yield to Maturity vs Rate of Return

Yield to maturity (YTM) is the total return anticipated on a bond if it is held until it matures and represents the average annual return that an investor will receive on the bond. The rate of return is the percentage gain or loss on an investment over a specified period, expressed on an annual basis.

Yield to maturity is also known as a bond’s book yield or redemption yield. It is the estimation of the internal rate of return that is held until it matures.

Additionally, it is the internal rate of return of an investment in a bond only if the investor holds the bond until it matures, following the scheduled payments and reinvestment at the same rate. 

On the contrary, the rate of return is defined as the overall gain or loss of a person’s investment over a particularised period. Moreover, it is the annual percentage of profit earned on an investment, with this note assists one in understanding the power of investing in a particular asset. 

Comparison Table  

Parameters of Comparison	Yield to Maturity	Rate of Return
Definition	Yield to maturity is a single interest rate to investors at current market prices, assuming that interest is paid and held till maturity. In other words, YTM is also a markdown value of a bond, where all future cash inflows are given to the investor as the current price of a bond if the bond is held till maturity.	The rate of return is a sum of profit or loss attained by an investor on the given investment over a fixed period of time or till maturity. The rate of return is applicable to any ilk of assets, bonds, real estates and stocks etc.
Risk factor	In any case, the investor may sway the investment when the yield to maturity is less than expected another investment.	Market risk makes an impact on the rate of return. Where, if the market price is high, then the investor would be the beneficiary. But if the market price of assets is low, then the investors are at a loss. Moreover, when capital is at a loss makes a risk to ROR.
Calculated	Yield to maturity= the number of years to maturity root of (face value/current price – 1)	Rate of Return= the investment’s current value – its initial value) divided by the initial value; all times 100
Variations	There are three different types of YTM to measure the bond value by- Yield to call, yield to put, and Yield to worst.	There are four types of return rates: money-weighted return, external flows, IRR, logarithm return, ordinary return, arithmetic average return, and annualized return.
Interest	The yield to maturity is a single interest rate or internal rate of return. It is the sum of future cash inflows that are equal to the bond’s market price at present. IRR is the interest rate that excludes external factors.	The rate of return is an interest paid by an investor on the assets on installment or as a whole sum until the assets get possessed by the owner.
Other names	Yield to maturity is also called Redemption yield and bond yield.	Rate of Return is also known as – The total return, capital return, annualized return, and net return.

What is Yield to Maturity?

Furthermore, yield to maturity is defined as the investment’s internal rate of return earned by the investor; that is, the buyer of today at the marketplace will charge that the bond will be held until its maturity, with payments and coupons made on schedule.

Additionally, it also determines the annual percentage rate of investment in the market convention. And compares the bonds that have different maturities and coupons. 

Yield to maturity concerns until your bond is matured, with all coupons and principal payments on schedule. It is also named book yield or redemption yield.

The function of yield to maturity occurs by dividing the annual cash inflows from a bond by the marketplace, eventually determining the amount of money to be invested in holding as well as buying a bond for one year.

In simple terms, it helps one to perceive the price of a bond from the market with the present value of all cash flows in the future. 

The formula to calculate the yield to maturity of a discount bond is the number of years to maturity root of (face value/current price – 1). Here the face value is the bond’s maturity value, while the current price is the bond’s price at present. 

What is the Rate to Return?

Rate to return is used to measure the net gain or loss of an investment over a determined period. In other words, it is signified as the rate of the investment’s paydown cost. The rate of return indicates the percentage change from the beginning of the period until the end of your investment. 

It applies to assets, stocks, real estate, art, and even bonds. The conversion from a return into a return over some time of a standard length is termed the rate of return. The rate of return is extrapolated based on a single period and after combined. 

In such a case, the rate of return of a single period of any length of time is calculated by the ratio of the difference between final(inclusive dividends and interest) and initial value to that of the initial value.

Moreover, it keeps tabs on the investor’s investments, such as interest payments, coupons, cash dividends, stock dividends, structured products, and so on. 

Main Differences Between Yield to Maturity and Rate of Return

1. Yield to maturity is a single interest rate of return on a bond or debenture, whereas the Rate of return is a net return, either profit or loss, attained from an investor on the investment. 
2. The beneficiary is given the yield to maturity or bond yield sum, assuming that the interest or coupon payments have been paid timely and the bond is held till maturity. On the other hand, the rate of return will be given to the beneficiary only when the investment gets maturity or interest has been paid. 
3. Yield to maturity is calculated as a discount bond is the number of years to maturity root of (face value/current price – 1). Besides, the rate of the return value is evaluated as the current price of investment (Minus), the Initial value of the investment (whole divided)by the Initial value, and 100 times multiplied. 
4. Yield to maturity is named as Book yield and redemption yield. Albeit the Rate of Return is also termed as Capital value, the net return and annualized return. 
5. Yield to maturity is an internal rate of return that excludes external risk and is given as future cash inflows at the current market price. While for the rate of return, interest is estimated as the payment made in instalments. 
6. The risk of Yield to maturity depends on competitors’ investment when the investor plans to sway because of less return than expected. Whereas, Rate of return risk depends on the market price and capital. 

References

1. https://www.jstor.org/stable/2326906
2. https://www.jstor.org/stable/1924568

Last Updated : 13 July, 2023