Debt Market or Fixed Income Market is still pretty much unexplored in India. Here are some terms to know about
Indian debt market.
What is Yield?
Yield refers to the percentage rate of return paid on a stock in the form of dividends, or the effective rate of interest paid
on a bond or note. There are many different kinds of yields depending on the investment scenario and the characteristics of the investment.
Yield to Maturity (YTM) is the most popular measure of yield in the Debt Markets and is the percentage rate of return paid on a bond, note or other fixed income security if you buy and hold the security till its maturity date.
Current Yield is the coupon divided by the Market Price and gives a fair approximation of the present yield. Therefore,
Current Yield = Coupon of the Security(in %) x Face Value of the Security (viz. 100 in case of G-Secs.) / Market Price of the Security.
Eg: Suppose the market price for a 10.18% G-Sec 2016 is Rs.120. The current yield on the security will be (0.1018 x
100)/120 = 8.48%.
The yield on the government securities is influenced by various factors such as level of money supply in the economy, inflation, future interest rate expectations, borrowing program of the government & the monetary policy followed by the government.
How is the Yield to Maturity computed?
The calculation for YTM is based on the coupon rate, length of time to maturity and market price. It is the Internal Rate
of Return on the bond and can be determined by equating the sum of the cash-flows throughout the life of the bond to
zero. A critical assumption underlying the YTM is that the coupon interest paid over the life of the bond is assumed to be reinvested at the same rate.
The YTM is basically obtained through a trial and error method by determining the value of the entire range of cash-flows for the possible range of YTMs so as to find the one rate at which the cash-flows sum up to zero
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