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Chapter 3Measuring yieldCurrent YieldCurrent yield relates the annual coupon interest to the current market price of the bondConsiders only coupon interest incomeDoes not consider capital gain or lossDoes not consider reinvestment income

Yield to MaturityAlso called the internal rate of return of a bondThe interest rate that will make the present value of the cash flows equal to the price (or initial investment)Rate of return promised to an investor if you purchased the bond at the current market price given coupon and maturity of the bond

Yield to MaturityYield to maturity will equal the actual rate of return to a bond investor if and only ifThe investor holds the bond to its maturity and All interim cash flows in the form of coupon payments are reinvested at the computed yield to maturity

The YTM takes into accountCoupon interest incomeCapital gain or capital lossInterest on interest incomeHow much YTM tells us about a bonds actual return?Depends on reinvestment risk andInterest rate risk

Yield to CallUsually, bond market participants compute both the yield to maturity and the yield to call for a callable bond and use the lower of the two to price bondsWhen bonds are trading at or above a specified crossover point, which is approximates the bonds par value plus one years interest, the YTC will normally provide the lowest yield measure

When is the bond issuer most likely to call back callable bonds?When the bond price rises to the price above par and the computed YTM becomes low enough that it would be profitable for the issuer to call the bond and finance the call by selling new bonds in the market.Total ReturnIn the preceding section we explain that the yield to maturity is a promised yield. If Both of the following conditions are satisfied:The bond is held to maturityAll coupon interest payments are reinvested at yield to maturity.