Corporate Finance Assignment: Yield to Maturity (YTM) Analysis

This assignment focuses on the concept of Yield to Maturity (YTM) in corporate finance. It defines YTM as the rate that equates the present value of a bond's cash flows to its price, essentially representing the total expected return if held until maturity. The assignment highlights the assumptions underlying YTM calculations, including holding the bond until maturity and timely payments. It emphasizes the importance of YTM for investors in assessing potential returns and making informed investment decisions in debt securities. A formula for YTM calculation is provided, illustrating how market prices influence the YTM value. The assignment concludes by positioning YTM as a benchmark for investment assessment, emphasizing its role in evaluating sensitivity to interest rate changes and facilitating the estimation of a fund's portfolio return potential.

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Author’s note

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Yield to maturity (YTM) is defined as the rate that makes the present value of cash flows
of a bond equal to the price of the bond. Thus, it is reflective rate of the discount rate that
makes present value of coupon and payments equivalent to the price of the bond. Briefly, it
can be said that YTM is total expected return on a bond if it is held until maturation. The
value of YTM changes every day as per the change in interest rates. The main underlying
assumptions involved in YTM measurement is that the bond is held till maturity, all
payments are made on time and it does not considers allowance for the tax that is paid by the
investor on return (Pilbeam, 2018).
YTM is important for a purchaser as it gives them idea about the rate of return they are
likely to get if they buy a bond and continue with it till maturity. In the field of finance, YTM
is regarded as an important investment tool as it is reflective of security rate while purchasing
a bond. Calculation of YTM value can help them to decide whether to invest in debt
securities or not. The following formula helps in the calculation of YTM rate:
In the above formula, C stands for interest payment, FV denotes face value of the
security, PV denotes present value or price of the security and t indicates the times to reach
maturity. The aim of the formula is to find to determine the YTM values based on the current
and updated market price (Deutsch & Beinker, 2019).

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To sum up, YTM has become a benchmark for assessing different types of
investment. This calculation makes investors aware about sensitivity to interest rate changes.
Estimating the return potential of a fund’s portfolio has now become easier by using the
combination of YTM and duration.

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References:
Deutsch, H. P., & Beinker, M. W. (2019). Present Value Methods, Yields and Traditional Risk
Measures. In Derivatives and Internal Models (pp. 79-96). Palgrave Macmillan, Cham.
Pilbeam, K. (2018). Finance & financial markets. Macmillan International Higher Education.