What is the Difference Between Current Yield and Yield to Maturity?
🆚 Go to Comparative Table 🆚The main difference between current yield and yield to maturity lies in the time frame they consider and the factors they take into account. Here are the key differences:
- Current Yield: This measures the income provided by a bond at a given moment, focusing on the bond's present cash flow. It is calculated by dividing the annual interest payment by the bond's price. Current yield helps investors understand the bond's current return based on its price today and can fluctuate depending on the bond's price.
- Yield to Maturity (YTM): This is the total return expected on a bond if it is held until maturity, taking into account all interest payments and the return of the principal. YTM is a more comprehensive, forward-looking measure that assumes the bond is held to maturity and includes the return of principal and the reinvestment of interest payments at the YTM.
In summary, current yield provides a snapshot of a bond's present cash flow, while yield to maturity predicts a bond's value once it reaches the end of its term, including all interest payments and the return of the principal. Both measures can be useful when comparing bonds and refining your investment strategy.
Comparative Table: Current Yield vs Yield to Maturity
Current yield and yield to maturity (YTM) are two different measures used to evaluate the performance of bonds. Here is a table highlighting the key differences between them:
| Current Yield | Yield to Maturity (YTM) |
|---|---|
| Measures the annual income provided by a bond based on its current price | Measures the total return anticipated on a bond if held until its maturity, including interest payments and the return of the principal |
| Focuses on the present cash flow of a bond | Takes a longer view, predicting a bond's value once it reaches the end of its term |
| Can fluctuate depending on the price of the bond | Provides a more accurate long-term prediction of a bond's performance |
| Calculated by dividing the annual interest payment by the bond price | Calculated using a more complicated formula that considers the bond's purchase price, duration, coupon rate, and the power of compound interest |
| Useful for investors looking for immediate income from their bonds | Useful for investors looking to maximize profits by holding a bond until maturity |
In summary, current yield provides a snapshot of a bond's current cash flow, while yield to maturity offers a more comprehensive view of a bond's long-term performance. Both measures can be helpful when comparing bonds and refining your investment strategy.
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