Bond Yield

Yields That Matter More

Coupon and current yield only take you so far down the path of estimating the return your bond will deliver. For one, they don't measure the value of reinvested interest. They also aren't much help if your bond is called early—or if you want to evaluate the lowest yield you can receive from your bond. In these cases, you need to do some more advanced yield calculations. Fortunately, there is a spate of financial calculators available—some that even estimate yield on a before- and after-tax basis. The following yields are worth knowing, and should be at your broker's fingertips:

• Yield-to-Maturity (YTM) is the rate of return you receive if you hold the bond to maturity and reinvest all the interest payments at the yield-to-maturity rate. It is calculated by taking into account the total amount of interest you will receive over time, your purchase price (the amount of capital you invested), the face amount (or amount you will be paid when the issuer redeems the bond), the time between interest payments and the time remaining until the bond matures.



• Yield-to-Call (YTC) is figured the same way as YTM, except instead of plugging in the number of months until a bond matures, you use a call date and the bond's call price. This calculation takes into account the impact on a bond's yield if it is called prior to maturity and should be performed using the first date on which the issuer could call the bond.



• Yield-to-Worst (YTW) is whichever of a bond's YTM and YTC is lower. If you want to know the most conservative potential return a bond can give you—and you should know it for every callable security—then perform this comparison.

To get a more accurate picture of what a bond will cost you or what you received for it, you should also confirm that your broker has calculated the yield, adjusting the purchase price up (when you purchase) or down (when you sell) by the amount of the mark-up or commission (when you purchase) or mark-down or commission (when you sell) and other fees or charges that you are charged by your broker for its services. This is called yield reflecting broker compensation.

Three Assumptions YTM and YTC are based on the following assumptions: You hold your bond to maturity or call date. You reinvest every coupon. All coupons are reinvested at the YTM or YTC, whichever is applicable. Interest rates regularly fluctuate, making each reinvestment at the same rate virtually impossible. Thus, YTM and YTC are estimates only, and should be treated as such. While helpful, it's important to realize that YTM and YTC may not be the same as a bond's total return. Such a figure is only accurately computed when you sell a bond or when it matures.