Yield to Maturity A bond’s yield to maturity or internal rate of return

Ø Discount Rate being the rate of return that investors expect from securities of
comparable risk.
Ø Bonds or Debentures are debt instruments or securities. In case of a
bond/debenture the stream of cash flows consists of annual interest payments
and repayment of principal. These flows are fixed and known.
Ø The Value of the Bond can be found by capitalising cash flows at a rate of
return, which reflects their risk. The market interest rate or yield is used as the
discount rate in case of bonds (or debentures). The basic formula for the bond
value is as follows:


Ø Yield to Maturity A bond’s yield to maturity or internal rate of return can be
found by equating the present value of the bond’s cash outflows with its price in
the above equation.
Ø Zero-Interest Bonds (called zero-coupon bonds in USA) do not have explicit
rate of interest. They are issued for a discounted price; their issue price is much