The main underlying assumptions used concerning the traditional yield measures are:

1. The bond will be held to maturity.
2. Coupons can be reinvested at the yield to maturity

Limitations:
1. Current yield- Current yield only considers the coupon interest and no other sources for an investors return. It does not take into consideration the capital gain when a bond is purchased at a discount or the capital loss when the bond is purchased at a premium. Also, reinvestment income is not taken into consideration.

2. Yield to Maturity - Yield to maturity measures assume that the coupon payments will be reinvested at the coupon rate

3. Yield to Call - Yield to call assumes investor will hold the bond to the assumed call price and that the issuer will call the bond on that date which both are unrealistic. Also, the comparison of different yields to call with the YTM are meaningless because the cash flows stop once the issuer calls the bond.

4. Yield to Put - This assumes that coupon payments will be reinvested at the calculated yield and that the bonds will be put on the first date.

5. Yield to Worst - This measure does not identify the potential return over some time horizon and fails to take into account that the calculation for a YTW has different exposures to reinvestment risk.

6. Cash Flow Yield - Cash flow yield assumes that the coupons will be reinvested at the coupon rate and that the bond will be held to maturity. However, because cash flow yield tend to be used for MBSs or ABSs there is a risk that the bonds will be prepaid and the measure of cash flow yield will be thrown out the window.
Importance of Reinvestment Income and Reinvestment Risk

Related Articles
  1. Financial Advisor

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  2. Investing

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  3. Investing

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  4. Investing

    How Does A Bond’s Coupon Interest Rate Affect Its Price?

    All bonds come with a coupon interest rate, which is the fixed annual interest a bond pays.
  5. Investing

    How Bond Yields Could Topple the Stock Market

    Bond yields have reached a crucial point since the election that could be bad news for the stock market.
  6. Investing

    Interest Rates, Inflation and the Bond Market

    Interest rates, bond prices and inflation all have an impact on one another.
  7. Investing

    Understanding Interest Rates, Inflation And Bonds

    Get to know the relationships that determine a bond's price and its payout.
  8. Managing Wealth

    Finding The Best Yields

    Using yields to supplement earnings can mean big bucks, with the right strategy.
Frequently Asked Questions
  1. Why Do Most of My Mortgage Payments Start Out as Interest?

    Fear not: Over the life of the mortgage, the portions of interest to principal will change.
  2. What is the difference between secured and unsecured debts?

    The differences between secured and unsecured debt, and how banks buffer risks associated with each type of loan through ...
  3. How Many Times has Warren Buffett Been Married?

    Warren Buffett has been married twice in his life, but the circumstances surrounding the marriages were unconventional.
  4. What's the smallest number of shares of stock that I can buy?

    Many people would say the smallest number of shares an investor can purchase is one, but the real answer is not as straightforward. ...
Trading Center