Economics Bonds Questions
The difference between a bond's current yield and its yield to maturity lies in the calculation and interpretation of the two measures.
The current yield of a bond is calculated by dividing the annual interest payment by the bond's current market price. It represents the bond's annual return as a percentage of its current market value. Current yield does not take into account the bond's remaining term or any potential changes in its market price.
On the other hand, the yield to maturity (YTM) of a bond is the total return anticipated by an investor if the bond is held until its maturity date. YTM takes into consideration the bond's coupon payments, its purchase price, and the time remaining until maturity. It is a more comprehensive measure that accounts for both the bond's interest payments and any potential capital gains or losses upon maturity.
In summary, the current yield focuses on the bond's current income relative to its market price, while the yield to maturity considers the bond's total return over its entire holding period, incorporating both income and potential capital gains or losses.