What is the difference between yield to maturity and the rate?

Answer:

Bonds are liquid and relatively liquid securities, and there are several different methods of discounting their values to give investors a sense of their current value. The most common of them is called the yield to maturity, or yield, which represents the expected yield on the bonds if held until it Matures. Spot prices are not specific to bonds; most of the time their quotes for currency or goods, but can be useful for pricing bonds for immediate settlement. The spot rate is very similar to yield with one important exception: it varies from period to period as the future interest rate fluctuations are not expected.

To assess the difference between the ytm and spot rates, here is a brief overview of investing basics bonds. Bond prices sold at “face value,” or the dollar amount printed on the bonds, such as 1000$. Each bond generates interest payments, also known as “coupon”. The yield on the bonds is the discount rate, which represents the cash flow of its current dollar value. Nevertheless, the bonds, Express tools, as the maturity is constantly shrinking, which means fewer future coupons as they age.

Without going into technical details, it is important to know that the yield on bonds moves inversely with its price. Yield is calculated the interest rate the investor will earn from investing every coupon payment from the bond at an average interest rate to maturity. Thus, the bond is trading below par or discount bonds have yields higher than the actual coupon rate and bonds above par, or premium bonds have a yield lower than the coupon rate.

The spot rate is calculated by finding the discount rate that makes the cost of zero coupon bond is equal to its price. They are based on future interest rates, so spot rates can use different interest rates for different years to maturity, while the yield is average for. Essentially, this means that the spot courses to use more dynamic and potentially more accurate discount factor in the present assessment of the value of the bond.

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