Yield to Maturity

The yield or return provided by a bond to its maturity date; determined by a mathematical process usually requiring the use of a “basis book.” For example a 5% bond pays $5 a year interest on each $100 par value. To figure its current yield divide $5 by $95--the market price of the bond--and you get 5.26%. Assume that the same bond is due to mature in five years. On the maturity date the issuer is pledged to pay $100 for the bond that can be bought now for $95. In other words the bond is selling at a discount of 5% below par value. To figure yield to maturity a simple and approximate method is to divide 5% by the five years to maturity which equals 1% pro rata yearly. Add that 1% to the 5.26% current yield and the yield to maturity is roughly 6.26%.- www.ifebp.org