Glossary

Nominal YTM

Measure of yield-to-maturity which does not account for reinvestment of coupon payments in the course of the year. If the bond is placed at par, at the moment of placement par yield equals the coupon rate. For example, a bond with semiannual coupon of 10% would have par yield-to-maturity of 10%, while effective yield would amount to 10.25%.

If the cash flow from the bond has only one payment, the formula for par yield calculation would be as follows:

Where
P[1] – bond purchase price (inclusive of AI)
P[0] – overall payment of the bond (par plus coupon)

If the cash flow from the bond contains more than 1 payment, par yield is calculated on the bases of the following equation:

Where
r [eff] – effective rate
r [nom] – coupon rate
n – number of coupon payments per year

The par yield-to-maturity is a more accurate indicator than effective yield, but is a common term on financial markets of most developed countries. To a large extent it is a tribute to tradition due to comparative simplicity of this indicator. In Russia par (simple) yield is the official measure for calculation of yield on the market of short-term government bonds (GKO) and is widely used on the promissory note market.
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