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Effective YTM

The indicator of yield to maturity implying that the coupon payments will be re-invested each year at the same rate as the initial investment. Effective yield to maturity is the internal yield rate of all the cash flows from a bond.

Effective yield is the root in the following equation:

r – effective yield
C[i] – i-th coupon payment
t[0] – current date
t[i] – date of the i-th coupon payment
N - par
P – current price (inclusive AI)
T – number of payments on bonds

In technical terms, effective yield is a more correct measure than nominal yield. But due to tradition par yield is in much wider use on most developed markets. Effective yield is more frequently used in Russia, while in Ukraine both effective and nominal yields are common.


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