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4 Major Types of Municipal Bond Yields: What You Need To Know

Wednesday, Jun 10, 2015

Yield To Maturity, Current Yield, Yield To Call or Yield To Worst--what does it all mean? While you as an investor may have a passing familiarity with these terms, if you're investing in the municipal bond market, it is crucial that you understand these concepts. At the GMS Group, our primary focus is on municipal bonds and we are specialists in the municipal bond industry. Let's look at some of the terms you'll encounter when you work with us to purchase municipal bonds.

Yield To Maturity versus Current Yield

Yield To Maturity, often abbreviated as YTM, is defined as what you would earn on a bond if you held it from the date of purchase, until the bond matures. It takes into account the current market price of the bond, the time until it matures, and interest rates on the bond's coupons, as well as assuming that you're reinvesting interest payments at the same rate as the bond’s current yield.

Current Yield, meanwhile, refers to the ratio of the interest rate payable on a bond to the actual market price of the bond, stated as a percentage. For example, a bond with a current market price of par ($1,000) that pays eighty dollars ($80) per year in interest would have a current yield of eight percent.

Yield To Call or Yield To Worst?

When bonds are purchased, they are purchased with a maturity date, which factors in when an investor is looking to calculate a YTM amount. However, bonds can also have a Yield to Call date, where they can be called earlier than the maturity date. A bond might have a three year maturity, for example, and a two year callable date.

Finally, Yield To Worst is the lowest of Yield To Maturity, or Yield To Call and may be the same as Yield To Maturity, but never above.

When investing in municipal bonds, it's very important that you understand the different types of municipal bond yields. We can guide you through the process of calculating all municipal bond yields and help you find the best fixed income investments for your portfolio. We want to be your municipal bond authority. Contact us through our online form, or call and speak to one of our municipal bond specialists today at 877-467-0070 to begin assessing where municipal bonds fit into your portfolio.