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YouTube T3-10: Yield to Maturity Interpretations

Nicole Seaman

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Superficially, the yield to maturity (YTM, aka yield) simply inverts the usual time value of money (TVM) inputs by solving for the yield as a function of four inputs: face (future) value, coupon (payment), maturity (time), and current price (present value). But in terms of interpretation, I share four ways to think about yield: 1. Yield is the SINGLE discount rate that solves the present value to match the current price and consequently graphs a horizontal line; 2. Yield is an internal rate of return (IRR) which expects and reflects a "realistic" price input; 3. Yield is a complex average of the spot rates; e.g., if the theoretical price is the input, it will be close to the final spot rate; and 4. Due to reinvestment risk and interest rate risk (aka, duration risk), the yield (YTM) will only be the REALIZED yield if the bond is held to maturity AND the coupons happen to be reinvested at the same yield.

David's XLS is here: https://trtl.bz/2HifflO

 
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