Yield to Maturity Curve

Also known as bond yield curve, coupon curve, redemption yield curve, coupon bearing yield curve


This is the relationship between the discount rate and the days to maturity (time)
The yield to maturity for a bond is used to indicate the total return from the bond when held to maturity.
You can take any type (or class) of bond and plot the yield to maturity for different maturity dates.
This is the curve that most people are referring to when they talk about yield curves.
The treasury yield curve shows the relationship between the treasury securities (bills and bonds paying coupons) and maturity


This curve consists of the points "yield" vs "maturity" (at whatever price it is quoted, there is only one current price).



Creating

This can be constructed by taking one class of bond (for example US Treasuries) and plotting the calculated yield to maturity for different maturity dates.



Assumption

A big assumption is that it assumes that all the coupons are re-invested immediately at the coupon rate.
Obviously market rates will change over time so being able to re-invest at exactly this rate is unlikely.
This assumption creates reinvestment risk
Only bonds from the same class of issuer (and liquidity) are used
Everything is the same except the maturity dates.



The YTM of a coupon paying bond is a weighted average calculation of the zero-coupon rates up to maturity.
The later the coupon the more the weight is placed on it.



Important

The yield to maturity calculation assumes a flat yield curve.
Curves are normally plotted against whole years although the bonds used will rarely have an exact number of years to maturity.
On Bloomberg this is screen IYC


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