Yield to Maturity vs. Holding Period Return

There are many yields associated with bonds. Some examples are yield to call, yield to worst, current yield, running yield, nominal yield (coupon rate), and yield to maturity (YTM). Most investors are concerned with the yield to maturity because if an investor purchases a bond and holds it until maturity, their return will equal the yield to maturity (YTM).

On the other hand, if the investor does not hold the bond until maturity (a common practice for long-term bonds), the total return will be equal to the yield over the length of holding or the holding period return (HPR). Due to uncertainty about interest rate fluctuations and holding period duration, the holding period return can be more difficult to calculate than YTM.

Yield to Maturity

Yield to maturity (YTM), also known as book or redemption yield, reflects an investor’s yield for holding a bond until it matures. It does not account for taxes paid by the investor or incurred dealing costs. The YTM, often stated as an annual percentage rate (APR), assumes that all coupon and principal payments are made on time. Many computations also account for reinvested dividends, but this is not a required variable.

The YTM rate may differ from the coupon rate. The formula for calculating YTM, if done correctly, should account for the present value of the bond’s remaining coupon payments. The YTM formula can be seen as follows:

$begin{aligned} &text{YTM} = sqrt frac{ FV }{ PV } – 1 \ &textbf{where:} \ &FV = text{Face Value} \ &PV = text{Present Value} \ end{aligned}$​YTM=PVFV​​−1where:FV=Face ValuePV=Present Value​

YTM is different from standard yield calculations because it adjusts for the time value of money. Since inverting the time value of money requires a lot of trial and error, YTM is best left for programs designed for that purpose.

Holding Period Return

Bond investors are not obligated to take an issuer’s bond and hold it until maturity. The return on a bond or asset over the period it was held is called the holding period return (HPR). There is an active secondary market for bonds. This means someone could buy a 30-year bond issued 12 years ago, hold it for five years, then sell it again. In such a circumstance, the bondholder doesn’t care what the yield of the 12-year-old bond will be until it matures 18 years later. If an investor holds the bond for five years, they only care about the yield they will earn between years 12 and 17.

The bondholder should attempt to calculate the bond’s five-year holding period return. This can be approximated by slightly modifying the YTM formula. The bondholder can substitute the sale price for the par value and change the term to equal the length of the holding period. The holding period return formula is as follows:

$begin{aligned} &text{Holding Period Return} = frac{ I + EPV – IV }{ IV } \ &textbf{where:} \ &I = text{Income} \ &EPV = text{End of Period Value} \ &IV = text{Initial Value} \ end{aligned}$​Holding Period Return=IVI+EPV−IV​where:I=IncomeEPV=End of Period ValueIV=Initial Value​

If the bond is still owned, use the current market price rather than the selling price to determine the present holding period return yield.

Sometimes, investors use the holding period return yield to assess the yields of different bonds. The results identify which bonds are more favorable investments.

The Bottom Line

Yield to maturity is the annual yield given by a bond when it is held to maturity. Holding period return is the total yield an investor receives after holding a bond for a specific time. Each can be used to determine how long you can hold a bond if you’re deciding whether to hold a bond it until it matures, or only want to hold it for a short time.