Current Yield and How it is Related to Yield to Maturity

In this video, I explain what is meant by a bond's current yield and how it is related to its yield to maturity (YTM). In the process I also explain why, as long a bond's YTM remains constant, the price of a premium bond will consistently fall and why the price of a discount bond will consistently rise as they both approach maturity.
Students will particularly find this video useful in understanding parts of Chapter 8 (Interest Rates and Bond Valuation) of Corporate Finance (13th Edition) by Ross, Westerfield, Jaffe and Jordan.

[@gokuvegeta9500]

Best explanation I've seen

[@Invest-qh3jh]

Wow! Fascinating!

[@yashikaa7596]

Thank you for your effort, my concept has become more clear after this video

[@rurikball1504]

great stuff

[@karahsekir5494]

Great video, perfectly explained!

[@unknown1946]

Lovely explanation.

[@zan1971]

So basically current yield is the return that the investment actually makes in a year. And yield to maturity is the investor's required rate of return. And current yield will keep reducing to ultimately match yield to maturity because an above-par bond price will move downwards towards par thanks to market correction. Alright, let's see if I can understand reinvestment risk now.

[@jonathanisraelson9169]

he didint say that the face value was 1000 dollars and without that he cant calculate nothing

[@professorikram]

That’s true. The $1,000 Face Value is assumed, as that is the most common denomination of Treasuries.

[@user-es9nd1pt3s]

Why do you assume that YTM does not change after one year?

[@professorikram]

Great question! Basically, In order to drive home the point that the total return (YTM) on the bond is comprised of current yield and capital gains (just like a stocks total return is comprised of dividend yield and capital gains). I don’t HAVE to make this assumption - we can still do current yield and capital gains calculation. But if the YTM changes in one year, then the price at the end of one year will adjust accordingly, and the sum of current yield and capital gains will no longer add up to the initial YTM at which the investor bought the bond. Does that help?