In this paper, I will be discussing the concept of yield to maturity (YTM). There is a situation where a client is confused by what her broker has been telling them in regard to the bonds had purchased at 10 %. The broker continually repeats to her that the bond she holds has a 9 % yield to maturity. For a person whom has no idea what this means, her broker should carefully define what yield to maturity means. In addition, the broker should explain what the value of the bond is now and what it will be when it matures.
When explaining the concept of yield to maturity, one must first understand the meaning and understand that yield to maturity is very complex and hard to calculate. Yield to maturity is “the rate of return if the bond is held till the maturity date” (Zipf, 2008, p. 1)
The basic understanding of yield to maturity is that the yield is promised to the holder of the bond and assuming that she will hold onto the bond until it matures. YTM will characteristically go up as interest rates rises. An example of this would be: a client pays $100 and purchased a $110 par value bond which will mature in one year from the date of issue and it pays an annual $10 coupon, the return the client will receive is $20. The reason is there was a $10 value for the bond going up and $10 from the coupon payment, thus making the clients yield to maturity 20%
In conclusion, the first time client needs to be aware of what type of investments he or she is getting into. They will need to do some research and ask many questions. Brokers have the responsibility to advise their clients of what they are getting into, since the typical average person will have no financial knowledge and will need guidance.
Reference
Zipf, R. (2008). Yield-to-Maturity (YTM). StockJargon.com. Retrieved September 14, 2008. Retrieved from http://www.stockjargon.com/dictionary/y/yieldtomaturity.html