Are you looking to know about YTM full form in banking? If yes then you came to the article.
In this article you get to know YTM full form, YTM calculations, Yield, Maturity etc. This article is written after referring to more than 11 articles related to this topic.
YTM full form is YIELD TO MATURITY.
Yield to Maturity is a concept relating to Bonds, in YTM there are the two key terms those are
We will start with simple concept, which is maturity. Now if I tell you that a company issues a bond for 10 years, how much is the maturity, 10 years? It’s as simple as that. Bonds can be purchased at par, or at a discount or at a premium
But if I talk about the term yield, that’s where things start to get complicated. But if I were to tell you in a very simple way what is yield, it is nothing but how much return you are getting on the bond.
I will give you a very simple example to understand the concept of Yield and Maturity. Assume that there is a bond with face value Rs 1000 assume that the coupon rate 10% , coupon rate is nothing but the interest rate. Now you will tell me how much coupon I’m going to get on Rs 1000 x 10% that is nothing but ₹100.
But if I want to calculate yield on that, yield is nothing but the interest that you have gotten on it. divided by, so the return that is 100. Divided by what? Divided by the price at which you bought the bond in our cash what is the price at which we bought the bond? That was Rs 1000/- this one we call it as buying at par, buying at face value So 100/1000 is nothing, but how much 10% and that is nothing but your yield.
In this example Market Price of Bond is 800, face value of the bond was 1000, and coupon rate 10% and how much was my coupon payment? It was ₹100.
The change in face value is due to the change in the market price of the point. Now the new market price of the bond is ₹800. This is when I say that the bond is trading at a discount. 10% of what do I get interest? I get interest 10% of face value, not 10% of the market value. And that is why this 100 remains the same.
Now if we calculate yield, how much is going to yield?
How much is going to be the yield?
It’s going to be 100 / 800.
That is 12.50%
In Example 3 now the price of the bond went up from 800 to 1200.
Tell me this 10% going to change? No.
Is ₹100 going to change?, No
10% of face value has got nothing to do with market price of the Bond.
Tell me how much will be the yield?
Now yield will be 100 / 1200 and that is going to be 8.33%.
Now let’s understand the coined concept of Yield to Maturity. In simple words, it is nothing but a sum of two major things which to think all the interest that you’re going to get on the bond and whatever premium or discount that you’re going to get while you purchase the Bond so when we take a sum of these two, then put together the concept would be nothing but Yield to Maturity.
Assume that there is a bond of ₹1000. So what does that face value 1000 and assume that you buy it ₹800.
What is it you’re buying it at a discount.
It is assumed that it is paying 10% coupon rate.
So how much are you going to get? You’re going to get ₹100 every year and also assume that the maturity to the bond is 10 years, so you’re going to get ₹100
For how many years? Is it 10 years right ?No.
If you hold the bond till maturity, what are you going to get?
Components of YTM:
You got that ₹100 every year. That is a component 1 the original face value was 1000, you got it at 800. So that ₹200 gain is also your component, correct and those ₹100 that you’re going to get as interest payments, we assume that they are also going to be reinvested at YTM. So that third component of interest on interest is also going to be forming a part of you.
CALCULATION OF YIELD TO MATURITY
The following formula is used to calculate Yield to Maturity.
In this formula C refers to Coupon Payments.
T refers to Years to reach Maturity.
FV refers to Face Value of the Bond.
PV refers to Present Value of the Bond.
Dear reader, in this article you get to know about YTM full form, how to calculate YTM, Components of YTM, what is yield, what is maturity and other details related to it. Hope you understood the things better. If you have any questions regarding this article kindly contact us from contact page in this website.