2007-10-12 09:03:34 · 5 answers · asked by harish p 2 in Business & Finance ➔ Investing
The yield to maturity is an interest rate. It is an IRR (Internal Rate of Return). If you find the present value of each cash flow, discounted at the yield -- then the sum of those values is equal to the price of the bond.
To find the Present Value of a single cash flow, use this formula:
PV = C/(1+r)^N
Here C is the payment you receive
r is the one period discount rate (for US bonds, r = y/2 -- we divide by two because there are two compounding periods per year.
N is the number of periods until you get the cash flow.
Bond Duration is a measure of price sensitivity. If yields go up,then bond prices go down (and if yield goes down then prices go up). The duration tells you how much it should go up or down. From a mathematical point of view, the modified duration is:
Mod Dur = -(dP/dy)/P -- where P is Price as a function of yield -- if you don't know any Calculus, ignore this comment)
That is, the duration is the percent change in price for a small change in yield.
Jeff410's definition of duration is incorrect. He may be confusing Duration with time to Maturity.
2007-10-12 09:48:08 · answer #1 · answered by Ranto 7 · 0⤊ 0⤋
Bonds typically trade at some price other than par. Suppose a bond was issued with a 6% coupon, but since that time interest rates have risen. The bond will now be worth somewhat less than par. If it is sold, the buyer will score not only the coupons, which will be yielding a bit more than 6%, but also the gain in price when the bond is redeemed. The "yield to maturity" is then the internal rate of return of both the coupons and the redemption price, as against the purchase price.
It is also possible for a bond to trade at a price above par, if interest rates have declined. In this case, the buyer will realize less than 6% on the coupons, and will also take a bit of a hit when the bond is redeemed. So, the yield to maturity is less than 6% in this case.
2007-10-12 09:13:09 · answer #2 · answered by Anonymous · 0⤊ 0⤋
When bonds are first sold to the public they are sold for a set price. Usually the price is $1000. That is par. And they are sold with a certain interest rate, or coupon rate, for instance 7 percent. After a bond is initially sold it starts trading in the secondary market. So the par value $1000 will fluctuate.. That changes the actual rate an investor actually receives when they buy it in the secondary market. You wont actually receive 7 percent if the price of the bond fluctuates above or below $1000 par. The yield to maturity refers to the rate you actually receive, if you bought it in the secondary market at a price different from par. The yield to maturity assumes that you will hold the bond until it matures, and you invest the interest at the same rate.
Bond duration is how long it takes for the price to be paid back by the bonds interest payments.
2007-10-12 09:51:16 · answer #3 · answered by jeff410 7 · 0⤊ 0⤋
Yield to maturity is the total time it takes your bonds to reach their full (target) value. it is used to value bonds because bonds who mature quicker are more valuable.
I don't know what Bond Duration is.
2007-10-12 09:12:22 · answer #4 · answered by Greg B 2 · 0⤊ 1⤋
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2016-11-08 03:12:56 · answer #5 · answered by ? 4 · 0⤊ 0⤋