No. of Recommendations: 6
grold,

You wrote, How does APR differ from YTM?

See YTM: http://www.investopedia.com/terms/y/yieldtomaturity.asp

Quoting, The YTM calculation takes into account the bond’s current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupon payments are reinvested at the same rate as the bond’s current yield.

Both APR and YTM are compound (annualized) interest rates that assume reinvestment. However, YTM takes into account the fact that the current price and the redemption price (at maturity) of a bond may be different. YTM assumes maturity is the maturity date of the bond.

APR usually describes the rate paid on the balance of a loan. This can be different from the coupon rate as well, since APR expresses a compound (reinvested) annualized interest rate based on the balance of the loan and the coupon rate is simple interest. However note that the APR and the coupon rate will typically be very close when rates are low.

In general APR is not a useful metric for bond investors. YTM always is.

There is another term, YTW - Yield to Worst. http://www.investopedia.com/terms/y/yieldtoworst.asp

This is one of the number you need to know when the bond (or preferred) you are researching is callable. Yield to worst describes the effective rate you would receive if the bond is called at the earliest possible opportunity.

Quoting Investopia, The lowest potential yield that can be received on a bond without the issuer actually defaulting. The yield to worst is calculated by making worst-case scenario assumptions on the issue by calculating the returns that would be received if provisions, including prepayment, call or sinking fund, are used by the issuer. This metric is used to evaluate the worst-case scenario for yield to help investors manage risks and ensure that specific income requirements will still be met even in the worst scenarios.

- Joel
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