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Investors often determine a required yield, or the minimum return they want to get on a bond, before purchasing. Calculating the yield to maturity can inform you about whether a specific bond purchase will meet an investors expectations. These expectations may vary from investor to investor. However, the calculation gives investors concrete data with which to compare the value of different bonds. Bond issuers may not choose to allow a bond to grow until maturity. These actions decrease the yield on a bond. They may call a bond, which means redeeming it before it matures. Or, they may put it, which means that the issuer repurchases the bond before its maturity date. Yield to call (YTC) calculates the yield rate between the present and the call date of a bond. Yield to put (YTP) calculates the yield rate until the issuer puts the bond. The YTM does not account for taxes or for purchasing or selling costs. These effectively lower the yield on a bond. Also, investors must remember that these calculations are estimates only. Fluctuations in the market can have significant effects on the bond yield.
Use it to evaluate whether or not a bond is a good investment. Learn the variations of yield to maturity. Understand the limitations of yield to maturity.