Series 52: 2.3.1. Yield To Maturity And Basis Points

2.3.1. Yield to Maturity and Basis Points

Municipal bonds are most commonly traded and quoted in terms of their yield to maturity, expressed as an annual rate. Yield to maturity (YTM) is the anticipated rate of return of a bond if held until its maturity, given its coupon rate and the current market price. A bond’s YTM equals its coupon rate when its market price equals its par value. If a bond is purchased at a price greater than par, its yield to maturity will necessarily be lower than its coupon rate. Because the coupon rate remains constant, it stands to reason that if you pay more than face value for the bond, your yield will be less than the coupon rate if you hold the bond until it is redeemed. Likewise, if you purchase at less than par, your yield to maturity will be greater than the coupon rate. Yield to maturity is a good measure of a bond’s value for a tax-exempt bond.

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