There are mainly two important ways through which you can determine the value of a bond: Yield to maturity (YTM) and Spot Rate.
The chosen methods depend on whether the investor wants to hold on to the bond or wish to sell it in the open market.
Yield to maturity is defined as the total rate of return that has been earned by a bond when it expires and eventually the original investment(i.e. the principal) is repaid.
On the other hand, the spot rate is worth the given bond at any moment, if it were to be cashed in or out in the secondary market. The term “spot rate” Is usually used in stocks and commodities trading.
Bonds are fixed-income products that, in most cases, return a regular coupon or interest payment to the investor.
If an investor bought a bond with the intention of keeping it until its maturity date and reaping the regular returns it generates. Yield to maturity is the price that matters whereas If the investor wants to sell the bond on the secondary market, the spot rate is the crucial number.
Investors mainly prefer to consider the yield to maturity when they compare the offerings of one bond to another. Bond listings will help to show the YTM (yield to maturity) as an annual rate of return.
It is being calculated from the investor holding the asset until it matures completely. Calculating the yield to maturity is considered as a complicated process that assumes all the interest and payments that can be reinvested at the same rate of return similar to the bond.
Fortunately, online YTM calculators are also available to the service that can do the heavy math-lifting for us.
The spot rate that is also known as the spot price mainly represents the value of an asset during the time of the quote. The spot rate basis comes from the value of the asset in the marketplace at that moment. It also depends on how much an investor will pay to acquire it.
Spot prices can also be changed and these changes can significantly affect the market. Besides the commodities and currencies, assets also seem to possess spot rates.
Certain agencies such as Morningstar and Bloomberg list the spot price of different securities on their websites to help out the investors.
So the next time you buy or sell a bond take care of the Yield to maturity and Spot rate.
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