What is the difference between ‘interest rate’ and ‘yield to maturity’?

At any time in life, all people without exception have had to borrow money from relatives or an institution to carry out a project in their life. For example, when a child asks his parents for money to buy sweets, or when a good is mortgaged so that the bank provides the necessary liquidity to cover some expenses.

In the same way, many companies or government entities need money to carry out their projects , have funds to invest or to improve a service. Of course, these institutions need large sums of money, which a bank cannot supply.

It is there where companies or the government of a country use instruments that allow them to acquire the amount of money they need. These instruments are known as bonds, and they have interest rates and yield to maturity.

But what is a bond, or what is the difference between the rate and the yield? In this article each of these questions will be explained in a simple way, as you continue reading the information will be used to the maximum.

How to define what is a bond and a rate?

A bond is nothing more than a type of loan where the person requesting it becomes the lender. In the case of the institution that facilitates the bond, it is known as the issuer . For its part, a rate is nothing more than a tax that a consumer must pay for the private use of a public service. There are different types of rates , each one applies to different situations so you should know more about them.

One of the rates that exist is the interest rate that is based on the amount of money or price , which is paid for using money that has been received as a loan, and is sometimes marked by an annual percentage.

Now, the bonds or loans that someone makes have a series of characteristics or requirements that must be met, including a coupon rate and a yield. What they consist of will be explained below.

What is the coupon rate, yield to maturity, and how can they be differentiated?

The coupon rate is defined as the interest that the investor may receive periodically for the reason of having obtained a bond. This percentage can generally be easily calculated in Excel .

On the other hand, the yield to maturity is a totalized yield; or what the person who has invested will receive in a precise way, at the end of the expiration date. This can be expressed as a percentage and includes interest and earnings.

By knowing what these terms involve, it can be synthesized that when a public figure wants to get the necessary money to invest it and be able to carry out their projects; They are public or private, he uses a voucher to get the necessary amount.

However, certain percentages or interests are derived from these bonds that concern both parts of this instrument; and when all the calculations are made, the percentage of interest that the person who made the loan will receive is established in numbers.

Another factor that must be taken into account is that at the time of issuing the bond, the beneficiary who will obtain said loan must be aware of the conditions and the interest rate; in relation to the money received to be able to weigh whether it is feasible.

Also, it is emphasized that those who have acquired these bonds should not wait a certain period of time to be able to dispense with them and sell them; but they must make sure that the interest rate in relation to the bond has gone down or gone up in order to reach a good agreement.

It is important to emphasize that when terms are unknown, or ways of calculating certain things in the economic part regarding the financial transactions to be carried out, you should look for experts to carry out or look for pages that can explain in a simple way the procedure you want to carry out. finished.

 

by Abdullah Sam
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