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# Yield to Maturity VS market interest rate Bonds?

From what I understand so far, the Yield to maturity is derived from the bond price calculation which basically takes the PV of the discounted cash flows. My problem is that the market rate(Kb) is also derived from the same calculation.

From what Ive seen on the internet, some say that YTM = Kb and others say that Kb is <= YTM.

Some introduced the internal rate of return but how come is that in relation with the preceding.

Also I'm quite confused with the spot rate, short rate and forward rate.

Finally, the equivalent, effective and reported yield confuses me.

In summary the following terms confuse the crap outta me !!

1) Equivalent yield

2) Effective yield

3) Rate of return

4) YTM

5) reported yield

6) IRR

7) Interest market rate (Kb)

8) Spot rate

9) Forward rate

If you could untangle this mess and help me with the relations among these concepts,I would be totally grateful.

Thank you

### 3 Answers

- ?Lv 78 years agoFavorite Answer
Definitions of the various terms are given below:

-Definition of 'Bond Equivalent Yield - BEY'

A calculation for restating semi-annual, quarterly, or monthly discount-bond or note yields into an annual yield.

http://www.investopedia.com/terms/b/bey.asp

-effective yield

The total yield on a bond when interest payments are reinvested. The effective yield is always higher than the basic yield because interest from the investment is itself earning interest, an effect known as compounding

Read more: http://www.investorwords.com/7135/effective_yield....

-Definition of 'Rate Of Return'

The gain or loss on an investment over a specified period, expressed as a percentage increase over the initial investment cost. Gains on investments are considered to be any income received from the security plus realized capital gains

http://www.investopedia.com/terms/r/rateofreturn.a...

-Definition of 'Yield To Maturity - YTM'

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.

-Definition of 'Yield To Maturity - YTM'

The rate of return anticipated on a bond if it is held until the maturity date. YTM is considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply referred to as "yield" for short.

http://www.investopedia.com/terms/y/yieldtomaturit...

-Reported Yield:

Bond funds report both a distribution yield and a SEC yield, which are roughly analogous to the current yield and yield to maturity on an individual bond.

http://www.bnet.fordham.edu/Finance_Research_Cente...

-Dictionary Says

Definition of 'Internal Rate Of Return - IRR'

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

-IRR is sometimes referred to as "economic rate of return (ERR)."

http://www.investopedia.com/terms/i/irr.asp

- Interest market rate (Kb)

Rates prevailing in the market

-Definition of 'Spot Rate'

The price that is quoted for immediate settlement on a commodity, a security or a currency . Spot settlement is normally one or two business days from trade date

http://www.investopedia.com/terms/s/spot_rate.asp

-Definition of 'Forward Rate'

A rate applicable to a financial transaction that will take place in the future. Forward rates are based on the spot rate, adjusted for the cost of carry and refer to the rate that will be used to deliver a currency, bond or commodity at some future time. It may also refer to the rate fixed for a future financial obligation, such as the interest rate on a loan payment.

http://www.investopedia.com/terms/f/forwardrate.as...

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Source(s): As Above ..... - 5 years ago
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