Bond Yields... Caveat Emptor

By: Russ Kamp, CEO, Ryan ALM, Inc.

Happy to share with you a recent research piece by Ron Ryan discussing the problem with YTM as a return calculator. His 50+ years as an industry-leading fixed income researcher/portfolio manager provide him with a unique understanding of misleading yield calculations.

As Ron points out, Yield to Maturity (YTM) assumes you will reinvest every six months at the purchase YTM until maturity of the bond. How could this happen? Yields are changing every day, if not continuously. Furthermore, will you reinvest exactly every six months into the same maturity and same YTM? Sounds like Mission Impossible! In fact, the reinvestment rate on any bond is based on the total return of what you reinvested into. How many folks truly appreciate that fact?

As always, you can find this research note along with years of additional research insights at RyanALM.com. We hope that you find our insights meaningful.