Answer to Question #310759 in Macroeconomics for geoffroy

Question

Could you explain what „yield to maturity“ of a bond measures? How could we „read it“ as a measure of risk?

Answer 1

Yield to maturity of a bond is the percentage rate of return for a bond assuming that the investor holds the assets until its maturity date. It is the sum of all the remaining coupons payments. If the yield to maturity (YTM) is higher than the coupon rate, then it means that the bond is being sold at a discount to its pat value. If the YTM is lower than the coupon rate, then the bond is being sold at a premium. Therefore, it is a measurement of risk since it can either be sold at a discount or premium with risk being eliminated if sold at a premium.