What Is The Difference Between A Discount Yield And A Bond Equivalent Yield Which Yield Is Used

What is the difference between a bond equivilent yield and money market yield formula?

Bond Equivalent Yield: It is expressed as twice of the semi annual rate of return on a security. The convention inherited from concept of U.S. bond, which pays coupon semi-annually & yield is calculated by doubling the semi annual rate.Money Market Yield: Annualised rate of return on security which does not account for compounding. MMY is calculated by converting Holding Period Return for a period of one year.e.g. For a holding period return/yield of 4% on a security for 3 months to maturity.Bond Equivalent Yieldsemi annual rate = [ (1 + Holding Period Yield)^(180/n) ] - 1(1.04)^2 - 1 = 8.16%BEY = 2 * 8.16 = 16.32%Money Market Yield:MMY = Holding Period Yield * 360/n = 0.04 * 360/90 = 16%

What is the difference between current yield and yield to maturity (YTM)?

HiYTM vs Current YieldYield to maturity or YTM and Current yield are terms that are associated more with bonds. It is not that hard to differentiate the two. The terms themselves show that they are different. The Yield to Maturity is the yield when a bond becomes mature, while the Current yield is the yield of a bond at the present moment.The Current yield is used to make an Assessment on the relationship between the current price of bonds and the annual interest generated by bonds. The YTM is an anticipated rate of the return associated with bonds. The Current Yield is the actual yield an investor would get.The YTM can be called as the rate of return a person will receive for the bond until its maturity. If a bond is bought at a discount of the face value, the YTM would be higher than that of the Current Yield as the discount raises the yield. On the other hand, if a premium is paid for the bond, the YTM will be less to the current yield.Unlike the YTM, the current yield refers to the yield at the current moment and will not show the total return of the bond. The Current Yield also does not take into account the reinvestment risks.The Yield to maturity is determined by using several key elements. The current Yield is one such key element in determining YTM. The other determining elements include current market price and the Par Value. Current Yield can be calculated by dividing the annual payment by the price.When the yield to maturity determines the total return on the investment, the Current yield does not show that.Hope this would help:)

What is the difference between a return, yield, cap rate, and IRR?

Return. Generally this is the compounded return of an investment over the course of the investment's life. In other words, if I bought at 1 and sold at 2 three years later, my return would be 100%IRR. Internal rate of return. This is the annualized return of an investment. In the example above, my IRR would be about 26%. In other words, in order to make 100% over the course of 3 years I would have had to earn 26% compounded each year: 1.26*1.26*1.26=~2Yield. This is generally used in reference to the annual income distributed from a security such as bonds or dividend paying stocks. For example, if Coca Cola's stock price is 40 and it pays out $2 in dividends every year, it "yields" 5% (2/40=.05). Note that yield doesn't refer to income earned, it is only income that is distributed.Cap rate. A term generally used in real estate investing to describe the valuation of a property. It's very similar to a P/E ratio, but instead of using earnings in the denominator, real estate tends to use NOI, or net operating income (which is just an earnings calculation modified for the nuances of real estate investing.) A property with an NOI of $125,000 that's priced at $1,000,000 would be selling at a cap rate of 8% ($125,000/$1,000,000=8%)

What is the difference between yield and yield to maturity of Bonds? Also, what are the economic factors that determine the yield to maturity?

Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive plus any gain or loss. YTM is the yield which if used to discount all the cash flows makes the resultant Present Value equals to the current price of the bond. The 'yield' below is YTM.

What is the yield to maturity of a risk-free zero coupon $1,000 government bond that sells for $980?

the YTM of a zero priced at 980, with a face value of 1000 is (1000/980 - 1) = 2.041%. there is no risk premium associated with a risk-free bond (as specified in your example) and instead you can read that 2.041% as the time value of money, that is the amount one would pay to spend money now rather than spend money later (due to inflation expectations, characteristics of utility functions, etc).most bonds are quoted on the “bond equivalent yield” which is basically the rate that, if you divided this rate by two (because of semiannual payments), add one square it, and finally subtract 1, would equal the holding period return. in our example ((BEY/2 + 1)^2) - 1 = 2.041%. BEY = 2.031%. a BEY assumes you are accruing yield on a semiannual basis, which is the case for most bonds, and hence the yield is lower than our first calculation because “payments” are more frequent. however, as you can see, the different here is nominal (only 10 basis points) so it doesn't matter too much which one you use.

What is the relationship between YTM and the discount rate of a bond?

They can be considered part of the same thing and depends on the type of bond.Yield to maturity is a concept for fixed rate bonds and is the internal rate of return i.e. the rate at which future flows are discounted on a compound basis to give the present value of the bond including accrued interest.Now technically the discount factor is the 1/(1+y/n)^(tn) where t is the time and n is the periodicity of payment.However the discount margin is usually the spread over a benchmark to represent the credit risk to arrive at the yield to maturity. It is applicable to both floating rate and fixed rate bonds.Yield is a absolute measure, discount margins are relative measures.For example a bond with a 6% YTM when Treasury rates are 4% and the discount rate or margin is 2%, the 2% representing the risk premium over holding treasuries.I.e. two issues with the same maturity can have the same YTM but different coupons and discount rates/margins.

What is the yield that bond traders are always referring to (e.g. YTM current yield, etc.)?

Bonds that do not have early redemption (calls, puts) features are generally traded on a yield to maturity (YTM) basis. If bonds are callable, they will trade on the basis of yield to worst call. If bonds have a required periodic redemption (sinking fund, amortizing), they are traded on a sinking fund or DCF yield. Residential mortgage bonds are trade on both mortgage yield and bond equivalent yield. Note that bond yields are quoted based upon coupon frequency. For example, most US issued bonds, except mortgages, pay semi-annually while most bonds issued outside the US pay annually. All yields must be properly designated (annual, semiannual, etc) and put into common yield terms for comparability.The day-count basis (number of days used in month and year) is also important. US corporate bonds use a 30/360 while US treasuries use actual/actual. Mortgages pay monthly. All yields must be properly designated and put in to common yield terms for comparability. If you are interested in the bond markets, Frank Fabozzi’s Handbook of Fixed Income Securities is a must.

What is a Mortgage bond yield?

To calculate any bond yield, you will need to discount the cashflows by an interest rate that will equal to the bond price. The calculated interest rate would be the bond yield. Yields for treasuries, corporates and other noncallable bonds can be calculated accurately and easily, but unfortunately for mortgage bonds (aka mortgage backed securities, MBS), the cash flows are difficult to predict. This is because MBS have a embedded call option, where the borrower can pay off the loan early or refinance into another one.So there are several factors and assumptions at play here, main ones being: coupon, price, remaining length of underlying mortgage, and prepayment speed. The only uncertain variable would be the prepayment speed. Mortgage borrowers tend to prepay or refinance their mortgage the most when interest rates are low, so they can get a better deal on a mortgage and pay a smaller monthly payment. How does that behavior affect MBS yields?For a premium MBS (price > 100), the yield will be negatively correlated to the prepayment speeds. This is because the investor is paying over $100 (assume 105) for every $100 of the loan, so if the borrower prepays his mortgage, you only get $100 back without the expected interest payments for however many years. For a discount MBS (price<100) yield will be positively correlated with prepayment speeds. This is because you are paying less than $100 (assume 95) for every $100 of the loan, so if the borrower refinances, you get $100 back immediately when you just paid $95 for the investment!MBS traders can quickly approximate these yields by using a the YT (yield table) function on Bloomberg. They can quickly input their predicted speeds at various interest rate scenarios to see how it affects the yield, as well as duration, convexity and other risk metrics used in fixed income trading.