Learn everything about Bond Valuation YTM (Yield to Maturity). Get a fair idea about what is concept of YTM.

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Bond Valuation
Yield to Maturity
This is a rate of return which is generated by a bond over a period up to its maturity.
If the future cash flows of interest and redemption price are discounted using YTM,
the present value of such cash flows will be equal to its actual market price. In other
words, a rate of discounting which can make the intrinsic value equal to the actual
market price can be considered as YTM Rate.
For example, if a bond is issued at par with face value of ` 1,000 and redeemable at par
with coupon rate of 10% per annum is actually providing the yield of 10% per annum.
In other words, the YTM of such bond shall be 10% per annum.
However, in the same example if the bond is redeemable at premium, other things
remaining same, it would obviously provide an yield higher than 10%.
Annuity Bonds
These bonds are paid over a period of time by the same amount of cash flows each
year. Therefore, there is neither any coupon payment nor any redemption price. All
the cash flows of these bonds are spread over their life by way of annuities.
These are bonds which would repay the principal over its life along with interest by
way of constant cash flows. For example, a bond that is issued at ` 1,000 with 5 years
life provides an annuity of ` 260 per annum at end of each year over its life of 5 years.
The total cash flows over 5 years will be (` 260 x 5) = ` 1,300
This includes the principal repayment of ` 1,000 and the total interest of ` 300.
Changes in Intrinsic Value of Bond as it approaches its Maturity
(Inter-relationship between Intrinsic value and Redeemable Value)
The intrinsic value of the bond gets closer to the redemption price as and when the
bond approaches its maturity. If a Premium Bond is redeemable at par, its intrinsic
value constantly declines over time. If a Discount Bond is redeemable at par, its
intrinsic value constantly rises over time.
Zero Coupon Bonds (ZCB)
These are bonds which do not provide any coupon payments. In other words, there is
no interest payable on such bonds. These bonds are either issued at nominal discount
or at par and redeemable at a significant premium. The present value of cash flows
from this bond considers only the present value of redemption price which is its

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intrinsic value. With maturity date coming closer the intrinsic value of such bonds
increases.
Deep Discount Bonds (DDB)
These are such zero coupon bonds, which are redeemable at par but issued at
significant discount.
Callable Bonds
A callable bond is such a bond that provides an option to the issuer to call for
redemption at an earlier date as compared to maturity. Such bonds are generally
redeemed before maturity if the interest rate in the market declines. Inversely if the
interest rate increases the issuer will opt for redemption of the bonds at the specified
maturity date only. The call date is a specified date at which the issuer can call for
premature redemption. The call price of a bond generally is higher than the
redemption price payable on maturity, in order to compensate the investor.
Yield to Call (YTC)
YTC is applicable only for callable bonds. YTC is determined just like YTM. The only
difference is, while determining YTC the applicable date of redemption will be the call
date and not maturity date and the redemption value applicable at the call date shall
be considered in place of redemption at maturity.