What is “yield” in bond investing?
Yield is the rate of return an investor earns on a bond, given its current price and promised cash flows.
Yield is the bond’s internal rate of return (IRR) if held to maturity.
What is Current Yield and how is it calculated?
Current Yield measures annual coupon income relative to market price.
What is Yield to Maturity (YTM)?
Yield to Maturity (YTM) is the annualized rate of return an investor will earn if the bond is held until maturity, assuming:
All coupon payments are reinvested at the same YTM rate, and
The bond does not default, and
The investor holds the bond until maturity.
What is Yield to Call (YTC)?
YTC is the yield assuming the bond is called at the first call date.
uses:
Call price instead of maturity value
Call date instead of maturity date
Important when:
Bond trades at premiumInterest rates fall Investors must consider YTC for callable bonds.
What is Yield to Put (YTP)?
YTP is the yield assuming the investor exercises the put option at the first put date.
Relevant when:
Bond price falls
Interest rates rise
👉 Protects downside risk for investor.
What is Yield to Worst (YTW)?
YTW is the lowest yield among:
YTM
YTC
YTP
Assumes issuer/investor acts in their own interest.
👉 Conservative measure used in practice.
Memory trigger:
YTW = Worst-case yield scenario.
What assumptions underpin YTM?
Bond held to maturity
No default risk
Coupons reinvested at YTM
Flat yield curve (implicit assumption)
👉 These assumptions are often unrealistic.
What are the main limitations of YTM?
Reinvestment risk (coupons rarely reinvested at YTM)
Interest rate risk if sold before maturity
Ignores term structure differences
Not reliable for callable/putable bonds
Multiple IRR problem (rare but possible)
👉 YTM is a model-implied return, not guaranteed return.
