The yield to maturity YTM , book yield or redemption yield of a bond or other fixed-interest security , such as gilts , is the theoretical internal rate of return IRR, overall interest rate earned by an investor who buys the bond today at the market price, assuming that the bond is held until maturity , and that all coupon and principal payments are made on schedule. In a number of major markets such as gilts the convention is to quote annualised yields with semi-annual compounding see compound interest ; thus, for example, an annual effective yield of
YTM vs coupon rates. When buying a new bond and planning to keep it until maturity, the shifting of prices, interest rates, and yields, will generally not affect you, except if the bond is called.
A bond's coupon rate is equal to its yield to maturity if its purchase price is equal to its par value. The par value of a bond is its face value, or the stated value of the bond at the time of issuance, as determined by the issuing entity.
A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value. A bond's yield to maturity YTM is the estimated rate of return based on the assumption that it will be held until its maturity date and not called.
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. That coupon is fixed.
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