What Is the Difference Between YTC, YTM, And Coupon | Motilal Oswal

# What Is the Difference Between YTC, YTM, And Coupon? When it comes to bond investments, understanding the various metrics that determine returns is crucial. While the coupon rate represents the fixed return based on a percentage of the bond's face value, there are two more important concepts to consider: Yield to Maturity (YTM) and Yield to Call (YTC).

Yield to Maturity (YTM) reflects the effective return you'll receive if you hold a bond until its maturity date. On the other hand, Yield to Call (YTC) represents the effective return until the bond's callable date, when the issuer has the option to call back the bond.

In this article, we will explore these bond return metrics in detail by examining their differences. So, let's dive in and unravel the mysteries behind these essential bond metrics.

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## Differences Between Coupon Rate, YTM and YTC

Here are some of the key differences between the coupon rate, YTM and YTC.

### 1. Meaning:

• Coupon rate is the annual interest amount that the bond owner receives against the bond. If the bond is bought from the secondary market, the rate of interest will be calculated on the purchase price, rather than the face value of the bond. In this case, the bond’s rate of return is known as the yield rate.
• YTM is the percentage of return from the bond if the bond owner continues to hold the bond until its date of maturity. Here, it is assumed that the bond owner receives all the remaining coupon rates and the principal amount upon maturity.
• YTC is useful for investors with callable bonds. Here, YTC is the total return that can be received against a bond if it is held until the call date and not the date of maturity.

### 2. Fluctuation:

• The coupon rate always remains the same, irrespective of changes in the bond’s market price.
• The YTM remains the same as the coupon rate only as long as the bond price remains equal to its face value. If there is a change in the bond price, the YTM will change too.
• YTC is calculated on a shorter time span than YTM, as the call would always precede maturity.

### 3. Who uses them:

• A bond investor always refers to the coupon rate of the bond while investing.
• YTM is used mostly by bond traders who buy and sell bonds in the secondary market.
• YTC is used by investors who own callable bonds and are likely to redeem the bond if an opportunity presents itself.

### 4. Calculation method and formula:

• The coupon rate is calculated by considering the coupon payment receivable and the face value of the bond. The formula for calculating the coupon rate is:

(Annual Coupon or Interest Payment/Face Value of Bond) X100

• YTM is calculated by considering the future cash flows that the bond is expected to generate and the current market price of the bond. The formula for calculating YTM is:

Yield to Maturity = [Annual Interest + { (FV-Price)/Maturity}] / [(FV + Price)/2]

Here, the annual interest is the payout by the bond during the year, FV is the face value, Price is the prevailing market price of the bond and Maturity is the number of years left for the bond to mature.

• YTC calculation can be complicated as the date of the call is decided by the issuer as per the prevailing market situation. The issuer will make the call only if there is a scope to reduce the cost of debt. The formula commonly used for calculating YTC is:

P = (C / 2) x { (1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)

Here, P is the current market price, C is the annual coupon payout, CP is the call price, and t is the number of years remaining until the call date.

## Conclusion

Understanding the differences between the coupon rate, yield to maturity (YTM), and yield to call (YTC) is vital for bond investors and traders. Each metric serves a specific purpose and is influenced by market fluctuations. By grasping these distinctions and utilizing the appropriate calculations, investors can make informed decisions in the dynamic world of bonds.

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