Investments, tenth edition

  Yield to Maturity versus Holding-Period Return 

 In Example 14.8, the holding-period return and the yield to maturity were equal. The bond 

yield started and ended the year at 8%, and the bond’s holding-period return also equaled 

8%. This turns out to be a general result. When the yield to maturity is unchanged over the 

period, the rate of return on the bond will equal that yield. As we noted, this should not be 

surprising: The bond must offer a rate of return competitive with those available on other 

securities. 

 However, when yields fluctuate, so will a bond’s rate of return. Unanticipated changes 

in market rates will result in unanticipated changes in bond returns and, after the fact, a 

bond’s holding-period return can be better or worse than the yield at which it initially sells. 

An increase in the bond’s yield acts to reduce its price, which reduces the holding period 

return. In this event, the holding period return is likely to be less than the initial yield to 

maturity.  

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   Conversely, a decline in yield will result in a holding-period return greater than 

the initial yield.

 

0

0

5

10

15

20

25

30

Price (% of Par V

alue)

Time (years)

140

160

120

100

80

60

40

20

Coupon 

= 12%

Coupon 

= 4%

 Figure 14.6 

Price path of two 30-year maturity bonds, each 

selling at a yield to maturity of 8%. Bond price approaches par 

value as maturity date approaches.  

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 We have to be a bit careful here. When yields increase, coupon income can be reinvested at higher rates, which 

offsets the impact of the initial price decline. If your holding period is sufficiently long, the positive impact of the 

higher reinvestment rate can more than offset the initial price decline. But common performance evaluation peri-

ods for portfolio managers are no more than 1 year, and over these shorter horizons the price impact will almost 

always dominate the impact of the reinvestment rate. We discuss the trade-off between price risk and reinvestment 

rate risk more fully in Chapter 16.  

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7/17/13   3:51 PM

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P A R T   I V

 Fixed-Income 

Securities

 

 

 Here is another way to think about the difference between yield to maturity and 

holding-period return. Yield to maturity depends only on the bond’s coupon,  current  

price, and par value at maturity. All of these values are observable today, so yield to 

maturity can be easily calculated. Yield to maturity can be interpreted as a measure of 

the  average  rate of return if the investment in the bond is held until the bond matures. In 

contrast, holding-period return is the rate of return over a particular investment period 

and depends on the market price of the bond at the end of that holding period; of course 

this price is  not  known today. Because bond prices over the holding period will respond 

to unanticipated changes in interest rates, holding-period return can at most be forecast.