The YTM represents the implied rate of return on a particular loan at a particular point in time.
It is useful for buying loans on the secondary market and understanding what the actual rate of return is, bearing in mind that loans can be sold below par, at par and above par, and may have already paid monthly interest.
The YTM is determined at the time I go to buy the loan on the secondary market and is valid if and only if I hold the loan until its maturity.
The purpose of this tutorial will not be to calculate the YTM yourself, as it is already calculated automatically by the platform, but to understand how it works.
Below are 3 scenarios for which the following apply: bullet loan, amount of €100, maturity 12 months after the purchase date and TAN (annual interest rate) of 5%.
If I buy the loan at par (i.e. at €100), in 1 year I will have €100 + €5 in interest. The YTM is equivalent to the TAN: 5%.
If I buy the loan below par (e.g. at €97), in one year's time I will have €100 + €5 in interest + €3 in capital gains over the purchase price. In this case, therefore, the bond yields more than 5%. In concrete terms, the YTM at the date of purchase will be 8%.
If I buy the loan above par (e.g. at €103), in 1 year's time I will have €100 + €5 in interest - €3 in capital gain over the purchase price. So in this case the bond yields less than 5%. The YTM will be 2%.
In the secondary market, sellers can choose to sell at a premium (above par) or at a discount (below par). It is important to always check the YTM to see what the expected return on the investment will be.
EvenFi imposes certain parameters on sellers of a loan so that the YTM is always positive to protect buyers from potential losses.
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