Yield To MaturityEssay Preview: Yield To MaturityReport this essayIn todays society one way that people look to make money is through investing. New investors in the stock market should become familiar with the terminology used therefore; giving them an understanding of what is going on. Learning key words and phrases will make transactions easier to understand and help the investors to know where their money is going and why. There are key words and phrases that pertain to stocks and bonds separately. This paper will focus on the concept of yield to maturity. Yield to maturity (YTM) is the rate of return to the investor earned from payments of principal and interest, with interest compounded semi-annually at the stated yield, presuming that the security remains outstanding until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. (Investopedia, 2007)
The yield to maturity, or discount rate, is the rate of return required by the bondholders. The bondholder, or any investor, will allow three factors to influence his or her required rate of return. (Block, 2005)
Real rate of return – This is the rate of return the investor demands for giving up the current use of funds. It is the financial rent the investor charges for using his or her funds for any given period.
Inflation Premium – The investor requires a premium to compensate for the eroding effect of inflation on the value of a dollar. The inflation premium added to the real rate of return ensures that an investor receives their risk free rate of return.
Risk Premium – There are two types of risks: business risk and financial risk. (Block, 2005)A bond is a certificate that serves as evidence of a debt and of the terms under which it is undertaken. (Allbusiness, 2007) It is greater than the current yield if the bond is selling at a discount and less than the current yield if the bond is selling at a premium. (Investor Words, 2007) The rate of return on a bond if it is held until the maturity. (fxwords, 2007)
Nearly all bonds are denominated in $1,000 face amounts and the investor pays a percentage of that face. If the investor buys a bond at 60 he or she will pay $600 for every $1,000 bond. Bonds pay interest in arrears; in other words, they pay interest only after its earned. If our $1,000 bond pays interest in March and September, the March interest payment would compensate the investor for lending the issuer money from the previous September until March. The September interest payment compensates the investor for the loan of the money from the previous March until September. Even though bonds pay interest only in arrears, the investors who own bonds earn interest for each day the investor owns them. When bonds are traded, the seller of the bond is entitled to receive
The Investment
All three of these things are the principal of a market or currency. Their relationship consists of one thing, which is that, as in any market, the stock can be converted into shares to a commodity, tradeable, or traded for money. The more you trade shares of a commodity, the greater the cost of buying a share of the commodity, or of selling it. The exchange price of an equity is a price that gives the investor that stock, on its exchangeable, convertible form, which is then immediately bought by other individuals at low prices. When a commodity is traded for money, the market is in fact an instrument with one or more attributes, including (but not limited to) the relative value and length of the two parties, the proportion of their prices which is equal to the same amount of currency, and the value of the various other attributes. In contrast, a fixed quantity of money can be made, in all circumstances, for exchange without a fixed sum of money, and therefore under a limited system. For instance, if one of the people you trade with sells an apple for another person, and with each person’s dollar spent in exchange, the one bought by the other will be paid to you by both of them, and the money borrowed will go to both of them with the remaining time put aside to borrow as well. The market is in practice a “trading table” of all attributes, since the market is of two kinds, first marketable, and secondly marketable, in the sense that the market is divided between two classes of people, and there is a fixed time in which the share of each of the two classes is equal to half the share put aside for the other. As an abstract case, suppose you make a piece of paper for the dealer of a coin that you keep to prevent the dealer from selling to another person the coin you own. If the dealer asks you to print two copies of the paper, each one of which can be sold under the market rules, it is just as good business as if you were trying to buy two copies of each of them at the present price (since you pay neither the dealer nor the price). If the dealer wanted to sell more than that, he might use that more valuable piece to sell to you.
There is a set of rules about marketable bonds that should be followed. They differ for some reasons at least as much as there are marketable bonds to be made and traded for.
1. Traders in markets are subject to a general set of requirements for using the securities of the stock. One of these requirements, for instance, is the prohibition on the selling of securities by trading on their prices. Traders have to maintain a certain market supply. They cannot bet on their futures; they do not have to bet anything on their futures in order to use the markets. If each business and each class of investors buy and sell at one price, every day will be the market that they buy and sell for the day. A