Question

Define Current Yield and Yield to Maturity. Why do we need two return measures on bonds?

Answer 1

Yield to maturity

The percentage rate of return paid on a bond, note, or other fixed income security if the investor buys and holds it to its maturity date. The calculation for YTM is based on the coupon rate, length of time to maturity, and market price. It assumes that coupon interest paid over the life of the bond will be reinvested at the same rate.

The annual return on a bond held to maturity when interest payments and price appreciation (if priced below par) or depreciation (if priced above par) are considered. When a bond sells at par, the yield to maturity is the same as the current yield because price appreciation or depreciation is zero if the security is held to maturity. Bond quotations are generally on a yield-to-maturity basis, although an investor who sells a bond before maturity may earn a yield different from the yield to maturity as calculated at the time the security was purchased. See also internal rate of return, maturity basis.

Current Yield

The annual rate of return received from an investment, based on the income received during a year compared with the investment's current market price. For example, a bond selling at $800 and paying an annual interest of $80 provides a current yield of or 10%. Also called rate of return, running yield.

The income from dividends (for stocks) or coupons (for bonds) divided by the market price of the security, expressed as a percentage. This is sometimes used in making the decision of whether or not to buy a security, but it does not accurately reflect its return, as the market price changes constantly. It is also called the current return or the running yield.

Bond returns
1.Current yield
2.Spot interest
3.holding period yiels
4. Yield to maturity
5.Yield to call

we need two return measures on bonds because te price sensitivity of bonds increases with maturity. But it increases at a drcreacing rate
Bonds with longer maturity experiances greater percentage change in price for agiven change in interest rates
Bonds prices move inversely with interest rates