AMFI Registered Mutual Fund Distributor | SEBI registered Investment Adviser
                Fundsupermart.com | Global   
SEARCH 
  Need Investment Help?
Talk To Us.
  *   
  *   
  *   
 
Funds and Personal Finance
   SUBSCRIBE TO E-NEWSLETTER
Subscribe
Share |
  Email
Print
more
ABC of Fixed Income Investing - 4 Important Things That YTM Tells You May 31, 2011
Series on basics of investing in fixed income funds-Part VI
Author : Niketa Agarwal


 ABC of Fixed Income Investing - 4 Important Things That YTM Tells You

Retail investors in India can be said to be reasonably well informed when it comes to investments in equities, real estate or even assets like gold or silver. The Fixed Income asset class, however, is not so well known. As a tool for diversification, and as a safe avenue for volatile times, understanding this class is important. Even experts agree that greater retail participation in the fixed income market in India will make it more robust.

Fundsupermart.com has always tried to draw notice to this asset class through various research and personal finance articles on the website. Taking this initiative further, we bring to you this series explaining basics of fixed income investments!

A. INTRODUCTION TO THE FIXED INCOME ASSET CLASS>>

B. Understanding YIELD>>

C. SECURITIES THAT DEBT FUND MANAGERS INVEST IN>>

D. INTRODUCTION TO DEBT MUTUAL FUNDS>>

E. Types of Risks>>

F. 4 Important Things That YTM Tells You

Yield-To-Maturity (YTM) is the measure of returns accrued by an investor when his investment is held till maturity. Therefore, YTM is an indicator of total returns that an investor would receive at the end of the maturity period.

I. YTM of an investment however undertakes certain assumptions which include:

  • The investment is held till maturity
  • The regular coupons before maturity are reinvested at the YTM rate as a lower rate would result in lower returns. In practice, if the reinvestment rate happens to be lower than the YTM rate, then the returns achieved are also lower.

II. Factors affecting YTM of a bond:

1. Coupon rate : Directly proportional to the yield. Higher coupon rate results in higher interest income provided to the investor and vice versa.

2. Years until maturity :  Directly proportional to yield. Greater the number of years to maturity, more coupon payments to the investor and vice versa.

3. Bond price : Indirectly proportional to yield. More return i.e., yield is accrued by an investor at a lower price and vice versa.

4. Difference between face value and price : On holding the bond till maturity, the investor receives amount equal to the face value of the bond. However, the difference between the face value and the price of the bond is paid by the investor. The discounted or premium on the price assumes importance in return calculation.

III. YTM and Debt Funds

1. YTM of a bond acts as its benchmark. The investor after looking at the benchmark can decide whether the bond accrues returns per his expectations because the YTM of a bond tells him the amount received by him at bond’s maturity.

2. Also, at the same time an investor can know if the bond being purchased by him is at a discount or premium.

3. YTM helps investors compare returns from other securities. By knowing the YTM of a bond, an investor gets an idea of the returns being accrued by him if he holds the particular bond till maturity. Therefore, he gets an opportunity to compare returns from different securities and then invest in the one matching his requirements.

4. YTM provides investors a chance to know their bond yields varying with current market prices. This is so, as the prices fall the yields rise and vice versa. Thus, an investor can evaluate and foresee his portfolio results.

IV. Points to note with YTM:

1. YTM and Bond Price : The bond’s price is dependent on purchasing the bond at discount, par or premium. The difference between the purchase price and the maturity price accounts for the returns achieved by an investor on his investment.

2. Comparing YTM : Suppose an investor has to purchase a bond with a maturity of 5 years. There are three bonds available in the market with 5 yrs maturity, carrying a 5% coupon rate on them at different purchase price on them. All of them have an annual payment.

Bond 1: INR 100(at par)                     

YTM: 5.0%

Bond 2:  INR 90(at discount)           

 YTM: 7.5%

Bond 3: INR 110(at premium)

YTM: 2.83%

 The 3 bonds carry different YTMs. Therefore, comparing the bond’s price with the YTM of the bond, the investor can know if he is getting the bond at a premium or discount. At the same time, he can anticipate his returns at maturity. Also, he can take his call and invest in a bond with a 5 year or a 10 year maturity issued to him at a premium or a discount.

3. YTM of premium and discounted bonds : In contrast to the general belief of investors, the discount bonds offer better returns than premium bonds. This is because the recovery in the discounted price is calculated as a part of return calculation. Premium bond owners, on the other hand, may have a higher coupon rate attached which can provide a greater yield.

For Example: If there are two bonds available with equal maturity of 10 years having a par value of INR 1000:

Bond 1: INR 900 (At discount)

Rate: 3%                        

YTM: 4.25%

Bond 2: INR 1200   (At premium)

Rate: 4%

  YTM: 5.36%

It can be seen that a premium bond with a higher coupon rate has a greater YTM than a discounted bond at lower coupon rate. Therefore, investors with similar maturity bonds should invest bonds having a higher YTM. Hence, rather than opting for discounted bonds that would give an investor a lower coupon rate till maturity, investors could look at premium bonds having a better YTM.

4. YTM of callable bonds : The callable bonds have a lower yield than its YTM. Even if the interest rates fall, it would not cause the bond price to rise higher than its call price (remains the same).

Click here for Recommended Funds

We would continue with the series. Watch this space for more...

 


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



Comments (1) | Comment on this Article
 (Click on Comments/Comment on this Article to show or hide comments/post a comment)
USEFUL LINKS
Recommended Funds
Recommended Portfolios
Chart Centre
Risk Profiler

<%@ page import="com.fin.common.web.util.*"%> <%@ page pageEncoding="UTF-8" %> <%@page import="com.fin.common.manager.fund.FundManager"%> <%@page import="com.fin.common.dao.fund.FundInfoBean"%> <%@ include file= "pageTitle.jsp" %> <% I18NSession i18n = I18NSession.getI18NSession(session); boolean onLoadScript=false; // defining the default pages for the template if (main==null || main.equals("")) main="main.jsp"; if (header==null || header.equals("")) header="header.jsp"; if (footer==null || footer.equals("")) footer="footer.jsp"; if (leftBar==null || leftBar.equals("")) leftBar="leftBar.jsp"; if (leftBar2==null || leftBar2.equals("")) leftBar2=""; if (body_onload==null || body_onload.equals("")) body_onload=""; else { if (E2EEUtil.isE2EEStatusActiveFSM()) { onLoadScript = true; if (body_onload.lastIndexOf("/")!=-1) body_onload = body_onload.substring(body_onload.lastIndexOf("/")+1,body_onload.length()); body_onload = "javascript:"+body_onload+"()"; } } //System.out.println("Leftbar *******"+leftBar); Boolean isSecure = (Boolean)request.getAttribute("common.template.isSecure"); if ( isSecure == null ) isSecure = new Boolean(false); // Default secure = off %> <% String requestedURL = request.getAttribute("javax.servlet.forward.request_uri").toString(); %> <% if (request.getAttribute("article")!=null) { com.fin.common.dao.content.Article1Bean article = (com.fin.common.dao.content.Article1Bean)(request.getAttribute("article")); String Articleurl="http://www.fundsupermart.co.in/main/research/viewHTML.tpl?articleNo=" + article.getArticleno(); %> Fundsupermart.com -<%=article.getTitle()%> <% }else if(request.getParameter("sedolnumber")!=null && !"".equalsIgnoreCase(request.getParameter("sedolnumber").toString().trim()) ){%> <% FundManager fm = new FundManager(); FundInfoBean fundinfoBean1=fm.loadFundInfo(request.getParameter("sedolnumber").toString().trim()); %> fundsupermart.com -<%=fundinfoBean1.getFundName() %> <% }else if(strPageTitle!=null && !"".equals(strPageTitle)){ %> <%=strPageTitle %> <% }else{ %> fundsupermart.com -<%=ProjectProperty.get("common.tagline")%>|<%=ProjectProperty.get("common.taglineExt")%> <% } %> <% if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.gettingStarted")!=null && ProjectProperty.get("fsm.metatag.main.school.gettingStarted").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.basics")!=null && ProjectProperty.get("fsm.metatag.main.school.basics").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("6")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.investing")!=null && ProjectProperty.get("fsm.metatag.main.school.investing").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("1")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("6")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("7")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("8")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("9")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("10")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("11")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.school.financialPlanning")!=null && ProjectProperty.get("fsm.metatag.main.school.financialPlanning").toString().indexOf(requestedURL)!=-1){ %> <% if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("2")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("3")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("4")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("5")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("7")){ %> <% }else if(request.getParameter("PageID")==null || (request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("")) ){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("10")){ %> <% }else if(request.getParameter("PageID")!=null && request.getParameter("PageID").toString().equalsIgnoreCase("12")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.research.listArticles")!=null && ProjectProperty.get("fsm.metatag.main.research.listArticles").toString().indexOf(requestedURL)!=-1){%> <% if(request.getParameter("categoryid")!=null && !request.getParameter("categoryid").toString().equalsIgnoreCase("") && request.getParameter("categoryid").toString().equalsIgnoreCase("17")){ %> <% }else if(request.getParameter("categoryid")!=null && !request.getParameter("categoryid").toString().equalsIgnoreCase("") && request.getParameter("categoryid").toString().equalsIgnoreCase("26")){ %> <% } %> <% }else if(requestedURL!=null && ProjectProperty.get("fsm.metatag.main.research.viewHTML")!=null && ProjectProperty.get("fsm.metatag.main.research.viewHTML").toString().indexOf(requestedURL)!=-1){%> <% if(request.getParameter("articleNo")!=null && !request.getParameter("articleNo").toString().equalsIgnoreCase("") && request.getParameter("articleNo").toString().equalsIgnoreCase("149")){ %>