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Mental Health Act 1983
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Mental Health Act 1983
Parliament of the United Kingdom
Long title
An Act to consolidate the law relating to mentally disordered persons.
Citation
20
Territorial extent
England and Wales (full); Northern Ireland and Scotland (parts of the Act)
Dates
Royal assent
9 May 1983
Commencement
30 September 1983
Status: Amended
Text of the Mental Health Act 1983 as in force today (including any amendments) within the United Kingdom, from legislation.gov.uk
The Mental Health Act 1983 (c.20) is an Act of the Parliament of the United Kingdom which applies to people in England and Wales. It covers the reception, care and treatment of mentally disordered persons, the management of their property and other related matters. In particular, it provides the legislation by which people diagnosed with a mental disorder can be detained in hospital or police custody and have their disorder assessed or treated against their wishes, informally known as "sectioning". Its use is reviewed and regulated by the Care Quality Commission. The Act has been significantly amended by the Mental Health Act 2007.
Contents
1 History
2 Overview
3 Analysis
3.1 Definition of mental disorder
3.2 Professionals and persons involved
3.2.1 Subjects
3.2.2 Approved Mental Health Professionals
3.2.3 Section 12 approved doctors
3.2.4 Approved Clinicians and Responsible Clinicians
3.2.5 Nearest Relatives
3.2.6 Mental Health Act Managers
3.2.7 Mental Health Review Tribunals
3.3 Civil sections
3.3.1 Assessment orders
3.3.2 Treatment orders
3.3.3 Leave and Discharge
3.3.4 Emergency orders
3.3.5 Holding powers
3.3.6 Magistrates' and police officers' orders
3.4 Criminal sections
3.4.1 Pre-trial orders
3.4.2 Post-trial orders
3.4.3 Transfer orders
3.5 Physical illness
3.6 Community Care and Treatment
4 Criticisms
5 Repeals and extent
6 See also
7 References
8 External links
8.1 UK Legislation
History[edit]
The Madhouses Act 1774 created a Commission of the Royal College of Physicians with powers to grant licences to premises housing "lunatics" in London; Justices of the Peace were given these powers elsewhere in England and Wales. Failure to gain a licence resulted in a hefty fine. Admission to a "madhouse" required certification signed by a doctor, and lists of detained residents became available for public inspection.[1] This Act was later considered ineffectual and was repealed by the Madhouses Act 1828, itself repealed shortly afterwards by the Madhouses Act 1832.[2] These Acts altered the composition of the Commission in several ways, such as including barristers in addition to doctors.
The Lunacy Act 1845 and the County Asylums Act 1845 together gave mental hospitals or "asylums" the authority to detain "lunatics, idiots and persons of unsound mind". Each county was compelled to provide an asylum for "pauper lunatics", who were removed from workhouses into the aforementioned asylums. The "Lunatic Commission" was established to monitor asylums, their admissions, treatments and discharges.
Both these acts were repealed by the Lunacy Act 1890. This introduced "reception orders", authorising detention in asylums.[3] These orders had to be made by a specialised Justice of the Peace and lasted one year. Thereafter, detention could be renewed at regular intervals by submission of a medical report to the Lunacy Commission.[2] The Mental Deficiency Act 1913 renamed the Lunacy Commission the "Board of Control" and increased the scope of its powers. The functions of the Board of Control were subsequently altered by the Mental Treatment Act 1930 and the National Health Service Act 1946.[4]
The Lunacy Act 1890 was repealed following World War II by the Mental Health Act 1959. This Act abolished the Board of Control, and aimed to provide informal treatment for the majority of people suffering from mental disorders, whilst providing a legal framework such that such people could, if necessary, be detained in hospital against their will. It also aimed to make local councils responsible for the care of mentally disordered people who did not require hospital admission.[5]
However, like its predecessors, the 1959 Act did not provide clarity as to whether a legal order to detain a mentally disordered person in hospital also empowered the hospital to impose medical treatment against the person's wishes. It had become clear by the 1970s that a specific legal framework for medical treatments such as psychiatric medications, electroconvulsive therapy and psychosurgery was needed in order to balance the rights of detained persons with society as a whole.
The Mental Health Act 1983 was formally approved by the monarch on 9 May 1983 and came into effect on 30 September that year. It has been amended three times: first in 1995, again in 2001 (via remedial order under the Human Rights Act 1998), and once more in 2007.
Overview[edit]
The Act is divided into ten "parts":
Application of the Act
Compulsory admission to hospital and guardianship
Patients concerned in criminal proceedings or under sentence
Consent to treatment
Mental Health Review Tribunal
Removal and return of patients within the United Kingdom
Management of property and affairs of patients
Miscellaneous functions of Local Authorities and the Secretary of State
Offences
Miscellaneous and supplementary
Each of these ten parts are divided into "sections", which are numbered continuously throughout the Act. In total, there are 149 sections in the Act.
Analysis[edit]
Definition of mental disorder[edit]
The term "mental disorder" is very loosely defined under the Act, in contrast to legislation in other countries such as Australia and Canada. Under the Act, mental disorder is defined as "any disorder or disability of mind". The concept of mental disorder as defined by the Act does not necessarily correspond to medical categories of mental disorder such as those outlined in ICD-10 or DSM-IV. However, mental disorder is thought by most psychiatrists to cover schizophrenia, anorexia nervosa, major depression, bipolar disorder and other similar illnesses, learning disability and personality disorders.
Professionals and persons involved[edit]
Subjects[edit]
Most people are subject to the Act, and section 141 even makes provision for members of the House of Commons, until it was repealed by the Mental Health (Discrimination) Act 2013. In 1983–84, the House of Lords Committee for Privileges accepted the advice of the law lords that the statute would prevail against any privilege of Parliament or of peerage.[6]
Approved Mental Health Professionals[edit]
An Approved Mental Health Professional (AMHP) is defined in the Act as a practitioner who has extensive knowledge and experience of working with people with mental disorders. Until the 2007 amendments, this role was restricted to social workers, but other professionals such as nurses, clinical psychologists and occupational therapists are now permitted to perform this role. AMHPs receive specialised training in mental disorder and the application of mental health law, particularly the Mental Health Act. Training involves both academic work and apprenticeship and lasts one year. The AMHP has a key role in the organisation and application of Mental Health Act assessments and provides a valuable non-medical perspective in ensuring legal process and accountability.
(For further aspects on the role of the AMHP see also: Involuntary commitment in the United Kingdom.)
Section 12 approved doctors[edit]
A section 12 approved doctor is a medically qualified doctor who has been recognised under section 12(2) of the Act. They have specific expertise in mental disorder and have additionally received training in the application of the Act. They are usually psychiatrists, although some are general practitioners (GPs) who have a special interest in psychiatry.
Approved Clinicians and Responsible Clinicians[edit]
An Approved Clinician (AC) is a healthcare professional who is competent to become responsible for the treatment of mentally disordered people compulsorily detained under the Act. A clinician must complete special training and demonstrate competence in their professional portfolio in order to be approved as an AC. Until the 2007 amendments, they would almost exclusively have been a consultant psychiatrist, but other professionals, such as social workers, clinical psychologists and nurse specialists, are being encouraged to take on the role. Once an AC takes over the care of a specific patient, they are known as the Responsible Clinician (RC) for that patient.
Nearest Relatives[edit]
A Nearest Relative is a relative of a mentally disordered person. There is a strict hierarchy of types of relationship that needs to be followed in order to determine a particular person's Nearest Relative: husband, wife, or civil partner; son or daughter; father or mother; brother or sister; grandparent; grandchild; uncle or aunt; nephew or niece; lastly, an unrelated person who resides with the mentally disordered person. Thus a person's Nearest Relative under the Act is not necessarily their "next of kin".
A mentally disordered person is not usually able to choose their Nearest Relative but under some circumstances they can apply to a County Court to have a Nearest Relative replaced. In practice, such applications are more commonly made by Social Services Departments. The Nearest Relative has the power to discharge the mentally disordered person from some sections of the Act.
Mental Health Act Managers[edit]
Mental Health Act Managers represent the management of the NHS Trust or independent hospital with responsibility for a detained patient. These are usually non-executive members of the board of the relevant National Health Service Trust and appointed lay 'Associate Managers'. Hospital Managers will hear appeals from patients against their detention and review renewals of lengthy detentions. Cases are heard in similar settings to those heard by the Mental Health Review Tribunal outlined below.
Mental Health Review Tribunals[edit]
Mental Health Review Tribunals (MHRTs) hear appeals against detention under the Act. Their members are appointed by the Lord Chancellor and include a doctor, a lawyer and a lay person (i.e. neither a doctor nor a lawyer). Detained persons have the right to be represented at MHRTs by a solicitor. Discharge from hospital as a result of an MHRT hearing is the exception to the rule, occurring in around 5% of cases, when the Tribunal judges that the conditions for detention are not met.
Civil sections[edit]
Part II of the Act applies to any mentally disordered person who is not subject to the Criminal Justice System. The vast majority of people detained in psychiatric hospitals in England and Wales are detained under one of the civil sections of the Act.
These sections are implemented following an assessment of the person suspected to be suffering from a mental disorder. These assessments can be performed by various professional groups, depending upon the particular section of the Act being considered. These professional groups include AMHPs, Section 12 approved doctors, other doctors, registered mental health nurses (RMNs) and police officers.
Assessment orders[edit]
Section 2 is an assessment order and lasts up to 28 days; it cannot be renewed. It can be instituted following an assessment under the Act by two doctors and an AMHP. At least one of these doctors must be a Section 12 approved doctor. The other must either have had previous acquaintance with the person under assessment, or also be a Section 12 approved doctor. This latter rule can be broken in an emergency where the person is not known to any available doctors and two Section 12 approved doctors cannot be found. In any case, the two doctors must not be employed in the same service, to ensure independence (this 'rule' was removed in the 2007 MHA amendment). Commonly, in order to satisfy this requirement, a psychiatrist will perform a joint assessment with a general practitioner (GP). A Mental Health Act assessment can take place anywhere, but commonly occurs in a hospital, at a police station, or in a person’s home.
If the two doctors agree that the person is suffering from a mental disorder, and that this is of a nature or to a degree that, despite his refusal to go to hospital, he ought to be detained in hospital in the interest of his own health, his safety, or for the protection of others, they complete a medical recommendation form and give this to the AMHP. If the AMHP agrees that there is no viable alternative to detaining the person in hospital, they will complete an application form requesting that the hospital managers detain the person. He will then be transported to hospital and the period of assessment begins. Treatment, such as medication, can be given against the person’s wishes under Section 2 assessment orders, as observation of response to treatment constitutes part of the assessment process.
Treatment orders[edit]
Section 3 is a treatment order and can initially last up to six months; if renewed, the next order lasts up to six months and each subsequent order lasts up to one year. It is instituted in the same manner as Section 2, following an assessment by two doctors and an AMHP. One major difference, however, is that for Section 3 treatment orders, the doctors must be clear about the diagnosis and proposed treatment plan, and be confident that “appropriate medical treatment” is available for the patient. The definition of “appropriate medical treatment” is wide and may constitute basic nursing care alone.
Most treatments for mental disorder can be given under Section 3 treatment orders, including injections of psychotropic medication such as antipsychotics. However, after three months of detention, either the person has to consent to their treatment or an independent doctor has to give a second opinion to confirm that the treatment being given remains in the person’s best interests. A similar safeguard is used for electroconvulsive therapy (ECT), although the RC can authorise two ECT treatments in the event of an emergency for people detained under Section 3 treatment orders. ECT may not be given to a refusing patient who has the capacity to refuse it, and may only be given to an incapacitated patient where it does not conflict with any advance directive, decision of a donor or deputy, or decision of the Court of Protection.
Leave and Discharge[edit]
Absence or “leave” from hospital can be granted by the RC for a patient detained under either a Section 2 assessment order or Section 3 treatment order, and the RC will ultimately be responsible for discharging a patient under such an order. Following discharge from a Section 3 treatment order, the person remains subject to the after-care provisions of Section 117 indefinitely. These provisions include a formal discharge planning meeting, and provision of personal care if necessary.
Emergency orders[edit]
Section 4 is an emergency order that lasts up to 72 hours. It is implemented by just one doctor and an AMHP, in an emergency in which there is not time to summon a second suitable doctor in order to implement a Section 2 assessment order or Section 3 treatment order. Once in hospital, a further medical recommendation from a second doctor would convert the order from a Section 4 emergency order to a Section 2 assessment order. Section 4 emergency orders are not commonly used.
Holding powers[edit]
Section 5(2) is a doctor’s holding power. It can only be used to detain in hospital a person who has consented to admission on an informal basis (i.e. not detained under the Act) but then changed their mind and wishes to leave. It can be implemented following a (usually brief) assessment by the RC or his deputy, which, in effect, means any hospital doctor, including psychiatrists but also those based on medical or surgical wards. It lasts up to 72 hours, during which time a further assessment may result in either discharge from the section or detention under section 2 for assessment or section 3 for treatment.
Section 5(4) is a nurse's holding power. It can be applied to the same group of patients as those that may be detained under section 5(2) as outlined above. It is implemented by a first or second level Mental Health or Learning Disability Nurse. Section 5(4) lasts up to 6 hours and ends at the time the patient is seen by the doctor assessing the patient under Section 5(2), irrespective of the outcome of the doctor's assessment. Time spent by a patient under section 5(4) is included in the 72 hours of any subsequent Section 5(2).
The Care Quality Commission consider it to be extremely poor practice to allow a section 5(2) to simply "lapse". There is a clear duty on the part of the patient's RC to make a decision as to whether any further action, such as detention under section 2 for assessment or detention under section 3 for treatment should be implemented, or whether the patient should be regraded to "informal" legal status.
Magistrates' and police officers' orders[edit]
Section 135 is a magistrates' order. It can be applied for by an AMHP in the best interests of a person who is thought to be mentally disordered, but who is refusing to allow mental health professionals into their residence for the purposes of a Mental Health Act assessment. Section 135 magistrates' orders give police officers the right to enter the property and to take the person to a “place of safety”, which is locally defined and usually either a police station or a psychiatric hospital ward.
Section 136 is a similar order that allows a police officer to take a person whom they consider to be mentally disordered to a “place of safety” as defined above. This only applies to a person found in a public place. Once a person subject to a Section 135 magistrates' order or Section 136 police officers' order is at a place of safety, they are further assessed and, in some cases, a Section 2 assessment order or Section 3 treatment order implemented.
Criminal sections[edit]
Part III and other various criminal sections of the Act apply to sentenced prisoners and persons subject to proceedings of the criminal justice System. Although they are invariably implemented by a court, often upon the recommendations of one or more psychiatrists, some of these sections largely mirror the civil sections of the Act.
Pre-trial orders[edit]
Section 35 and Section 36 are similar in their powers to Section 2 assessment orders and Section 3 treatment orders respectively, but are used for persons awaiting trial for a serious crime and provide courts with an alternative to remanding a mentally disordered person in prison. The order for Section 35 can be made by a Crown Court or Magistrates' Court, whilst Section 36 can be enacted only by a Crown Court. Courts can enact either of these sections on the medical recommendation of one Section 12 approved doctor. Both these sections are rarely used in practice.[citation needed]
Post-trial orders[edit]
Section 37 is a treatment order, similar in many regards to the civil treatment order under Section 3, and is fairly frequently used. It is applied to persons recently convicted of a serious crime, which is punishable by imprisonment. Thus it represents an alternative to a mentally disordered person being punished by imprisonment or otherwise. It is enacted by a Crown Court or Magistrates' Court on the recommendation of two approved doctors. However, the court is able to exercise discretion in this regard and can impose a prison sentence despite medical recommendations for Section 37.
A person detained under Section 37 can appeal to the Mental Health Review Tribunal after a period of six months; if he or she is no longer suffering from symptoms of mental disorder, the person can be discharged by the Tribunal, even if there is a strong possibility that the person might relapse and re-offend. Furthermore, a person on Section 37 alone, who may have been convicted of a serious violent crime, can be discharged in the community at any time by his or her Responsible Clinician (RC).
For these reasons, people who either are deemed by the court to pose a particularly high risk to other people if released, have a pronounced history of dangerous behaviour, or have committed a particularly serious offence, usually have Section 41 used in conjunction with Section 37. Section 41 imposes “restrictions” upon the terms of Section 37. In summary, this means that the Home Office and, ultimately, the Home Secretary, rather than the RC, decides when the person can leave hospital, either temporarily (“leave”) or permanently (“discharge”). Indeed, most people are ultimately given a "conditional discharge", which sets a statutory framework for psychiatric follow-up in the community upon release and provides for recall into hospital if, for instance, a person disengages from mental health services.
Only a Crown Court can impose Section 41, but a judge can do so without a doctor's recommendation. Although persons on Section 41 can appeal against their detention to the Mental Health Review Tribunal, their cases are heard by a Special Tribunal, chaired by a High Court judge. Since the 2007 amendments have been implemented, Section 41 is universally imposed without limit of time.
Section 38 is an interim order, used in similar circumstances to Section 37, when it is likely, but not wholly clear, that a Section 37 will be appropriate.
Transfer orders[edit]
It is noteworthy that the Act only provides for enforced treatment of mental disorder in a hospital. As a prison is not defined as a "hospital" by the Act, no prisoner can be treated against his or her wishes under the Act in prison, even in a prison healthcare wing. Instead, Sections 47 and 48 provide for prisoners to be transferred to a hospital for treatment of a mental disorder. Section 47 applies to sentenced prisoners, whilst Section 48 applies to those on remand and those convicted but awaiting sentence; it provides for temporary treatment out of prison. Section 48 can be used only for prisoners in need of urgent treatment for mental illness or severe mental impairment, whilst Section 47 can be used to treat any category of mental disorder. The Home Office is required to approve applications for these sections and decides what level of security in hospital is necessary for a particular prisoner.
Section 49 provides for “restrictions” to Section 47, in the same way that Section 41 provides for “restrictions” to Section 37.
Physical illness[edit]
The Act provides the legal framework for the assessment and treatment of mental disorders. It does not provide for the assessment or treatment of physical illnesses. There has been substantial case law to confirm this interpretation. Thus, a person who has a mental illness as well as an unrelated physical illness for which he is refusing treatment, cannot be treated for his physical illness against his wishes under the Act. In such cases, however, it might be deemed that the person lacks the mental capacity to consent to treatment of the physical illness, in which case treatment could be given, in the person’s best interests, under the Mental Capacity Act 2005.
However, if the physical illness is causing the mental disorder, or if the physical illness is a direct consequence of the mental disorder, treatment of the physical illness is permitted under the Act.
A common example of this is a person who has a short-lived confused state as a result of a physical illness such as an infection or a heart attack, but who is refusing assessment or treatment of the underlying condition. It is legal to treat such a physical illness under Section 2 of the Mental Health Act, on the grounds that treatment of the physical illness will alleviate symptoms of the mental disorder. However, this is rarely carried out in practice, given that the mental disorder is likely to be extremely transitory and emergency treatment is often necessary. It is more usual for physical illnesses to be treated under the Mental Capacity Act 2005 where appropriate in these circumstances.
On the other hand, enforced re-feeding of severely emaciated people with anorexia nervosa is more likely to take place under the Act, because treatment is likely to be prolonged and is rarely an emergency. Treatment is allowed because anorexia nervosa is classed as a mental disorder, whilst re-feeding is seen to constitute the first stage in treatment for severe cases of that mental disorder.
Lastly, treatment of an attempted suicide, which has been made as a direct result of a mental disorder, can be given under the Act. Again, in practice, this is unusual, as the emergency nature of the situation and the brief timeframe of treatment required usually dictate that treatment is given under the Mental Capacity Act instead.
Community Care and Treatment[edit]
The main thrust of the Act provides the power to detain a person in hospital to treat their mental disorder. There is currently no provision allowing compulsory treatment of mentally disordered people in the community. Indeed, the Act was drafted at a time when mental health care was focused on institutions rather than Care in the Community. Since the 1980s, there has been a huge shift in emphasis of mental health care away from inpatient treatment.
Under Sections 7 and 8 of the Act, “guardianship” allows for a mentally disordered person to be required to reside at a specific address, to attend a specific clinic on a regular basis for medical treatment, or to attend various other stipulated venues such as workplaces or educational establishments. However, there is no power to actually enforce the person to comply with these requirements. Indeed, although guardianship can require a person to attend a clinic for treatment, there is no requirement for the person to accept that treatment.
Supervised Community Treatment orders, under Section 17A of the Act, provide the power to return a patient to hospital if a specified treatment regime is not being complied with in the community. However, treatment cannot be enforced in the community. These orders are applied to the person at the time of his/her discharge from Section 3, and replace “supervised discharge” arrangements under Section 20A which were used until the 2007 amendments came into force.
Criticisms[edit]
There have been concerns amongst mental health professionals that the 2007 amendments have been based more upon tabloid stories on the danger presented by mentally disordered people, especially people with personality disorder such as Michael Stone, than on the practical shortcomings of the unamended Act. Critics asserted that it would mean mental health professionals being "suborned as agents of social control".[7] Supporters of more restrictive legislation insisted that dangerous people must be detained in hospital by doctors in their own interests and for public protection, regardless of whether they can be treated.[8]
Repeals and extent[edit]
This Act did not repeal any other Acts in totality. Schedule 6 lists 28 other Acts which had individual sections repealed. These include the Mental Health Act 1959, the majority of which was repealed by this Act.[9]
England and Wales: The entire Act applies to England and Wales.
Northern Ireland: Only the parts of the Act defined in s.147 have effect in Northern Ireland. The care of mentally disordered people in Northern Ireland is covered by the Mental Health (Northern Ireland) Order 1986, as amended by the Mental Health (Amendment) (Northern Ireland) Order 2004.
Scotland: Only the parts of the Act defined in s.146 have effect in Scotland. The care of mentally disordered people in Scotland is covered by the Mental Health (Care and Treatment) (Scotland) Act 2003.
See also[edit]
Fixated Threat Assessment Centre
References[edit]
Jump up ^ Overview, Madhouses Act 1774 External link in |title= (help)
^ Jump up to: a b Overview, Madhouses Acts 1828 and 1832 External link in |title= (help)
Jump up ^ Overview, Lunacy Act 1890 External link in |title= (help)
Jump up ^ Overview, Board of Control External link in |title= (help)
Jump up ^ Overview, Mental Health Act 1959 External link in |title= (help)
Jump up ^ Parliamentary Privilege First Report; CHAPTER 7: OTHER Rights are informal admittance and discharge after home leave and consented home team plus support network of patients 2013/08/11, archived from the original on 2008-11-19
Jump up ^ Mullen, P.E. (2005) "Facing up to our responsibilities", Psychiatric Bulletin, vol 29 pp 248–249. External link in |title= (help)
Jump up ^ Maden, A. (2005) "The point of principles", Psychiatric Bulletin vol 29 pp 250–251. External link in |title= (help)
Jump up ^ Schedule 6, Mental Health Act 1983 External link in |title= (help)
External links[edit]
Mental Health Act 1983: an outline guide Useful summary of the Act from 'Mind including updated material to take account of the Mental Health Act 2007
Factsheet 459: The Mental Health Act 1983 and guardianship, Alzheimer's Society
UK Legislation[edit]
Text of the Mental Health Act 1983 as in force today (including any amendments) within the United Kingdom, from legislation.gov.uk
Mental Health Act 1983 The complete text of the Act including Mental Health Act 2007 amendments.
CSIP Implementation programme for the amended Mental Health Act
Mental Health Act 1983 from WikiMentalHealth Fully amended to take account of the related legislation
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19th century
Criminal Lunatics Act 1800
County Asylums Act 1808
Marriage of Lunatics Act 1811
Scottish Madhouses Act 1815
Criminal Lunatics Amendment Act 1815
Irish Lunatic Asylums for the Poor Act 1817
Pauper Lunatics Act 1819
County Asylums Act 1828
Madhouses Act 1828
Chancery Lunatics Property Act 1828
Madhouses Act 1832
County Asylums Act 1845
Lunacy Act 1845
Idiots Act 1886
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Mental Deficiency Act 1913
Mental Treatment Act 1930
Mental Health Act 1959
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Yield to maturity
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The yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is the (theoretical) internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule.[1] Yield to maturity is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the current price of the bond. The YTM is often given in terms of Annual Percentage Rate (A.P.R.), but more often market convention is followed. In a number of major markets (such as gilts) the convention is to quote annualised yields with semi-annual compounding (see compound interest); thus, for example, an annual effective yield of 10.25% would be quoted as 10.00%, because 1.05 × 1.05 = 1.1025 and 2 × 5 = 10.[2]
Contents
[hide]
1 Main assumptions
2 Coupon rate vs. YTM and parity
3 Variants of yield to maturity
4 Consequences
5 Calculations
5.1 Formula for yield to maturity for zero-coupon bonds
5.1.1 Example 1
5.1.2 Example 2
5.2 Coupon-bearing Bonds
5.3 Varying coupon
6 See also
7 References
8 External links
Main assumptions[edit]
The main underlying assumptions used concerning the traditional yield measures are:
The bond will be held to maturity.
All coupon and principal payments will be made on schedule.
The yield to maturity is the single interest rate that equates the present value of a bond's cash flows to its price.[3] A common misconception is that the coupons must be reinvested at the yield to maturity. However, the paper Yield-to-Maturity and the Reinvestment of Coupon Payments says making this assumption is a common mistake in financial literature and coupon reinvestment is not required for YTM formula to hold. And, as Fabozzi states: "The implication is that the yield to maturity measure tells little about the potential yield that an investment may realize if held to maturity."[4]
The yield is usually quoted without making any allowance for tax paid by the investor on the return, and is then known as "gross redemption yield". It also does not make any allowance for the dealing costs incurred by the purchaser (or seller).
Coupon rate vs. YTM and parity[edit]
If a bond's coupon rate is less than its YTM, then the bond is selling at a discount.
If a bond's coupon rate is more than its YTM, then the bond is selling at a premium.
If a bond's coupon rate is equal to its YTM, then the bond is selling at par.
Variants of yield to maturity[edit]
As some bonds have different characteristics, there are some variants of YTM:
Yield to call (YTC): when a bond is callable (can be repurchased by the issuer before the maturity), the market looks also to the Yield to call, which is the same calculation of the YTM, but assumes that the bond will be called, so the cashflow is shortened.
Yield to put (YTP): same as yield to call, but when the bond holder has the option to sell the bond back to the issuer at a fixed price on specified date.
Yield to worst (YTW): when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yield to put, and others.
Consequences[edit]
When the YTM is less than the (expected) yield of another investment, one might be tempted to swap the investments. Care should be taken to subtract any transaction costs, or taxes.
Calculations[edit]
Formula for yield to maturity for zero-coupon bonds[edit]
Yield to maturity(YTM) = Face value Present value Time period − 1 {\displaystyle {\text{Yield to maturity(YTM)}}={\sqrt[{\text{Time period}}]{\dfrac {\text{Face value}}{\text{Present value}}}}-1}
Example 1[edit]
Consider a 30-year zero-coupon bond with a face value of $100. If the bond is priced at an annual YTM of 10%, it will cost $5.73 today (the present value of this cash flow, 100/(1.1)30 = 5.73). Over the coming 30 years, the price will advance to $100, and the annualized return will be 10%.
What happens in the meantime? Suppose that over the first 10 years of the holding period, interest rates decline, and the yield-to-maturity on the bond falls to 7%. With 20 years remaining to maturity, the price of the bond will be 100/1.0720, or $25.84. Even though the yield-to-maturity for the remaining life of the bond is just 7%, and the yield-to-maturity bargained for when the bond was purchased was only 10%, the return earned over the first 10 years is 16.25%. This can be found by evaluating (1+i) from the equation (1+i)10 = (25.882/5.7389), giving 0.1625.
Over the remaining 20 years of the bond, the annual rate earned is not 16.25%, but rather 7%. This can be found by evaluating (1+i) from the equation (1+i)20 = 100/25.84, giving 1.07. Over the entire 30 year holding period, the original $5.73 invested increased to $100, so 10% per annum was earned, irrespective of any interest rate changes in between.
Example 2[edit]
You buy ABCXYZ Company bond which matures in 1 year and has a 5% interest rate (coupon) and has a par value of $100. You pay $90 for the bond.
The current yield is 5.56% (5/90).
If you hold the bond until maturity, ABCXYZ Company will pay you $5 as interest and $100 par value for the matured bond. Now for your $90 investment, you get $105, so your yield to maturity is 15/90 =16.67% [= (105/90)-1] or [=(105-90)/90].
Assume now that you had to pay $101 for the same bond with a 5% interest rate. When the coupon is paid, you get $5. But you had to pay an extra $1 when buying the bond compared to the par value, your real gain is $4 for an initial investment of $101. Your yield to maturity is 4/101 = 3.96%
If you had paid $105 for the same bond, you would get $5 when the coupon is paid. However you had to compensate for the extra $5 of your initial investment. Your gain is 0 and so is your yield to maturity.
Coupon-bearing Bonds[edit]
For bonds with multiple coupons, it is not generally possible to solve for yield in terms of price algebraically. A numerical root-finding technique such as Newton's method must be employed to approximate the yield which renders the present value of future cash flows equal to the bond price.
Varying coupon[edit]
With varying coupons the general discounting rule should be applied.
See also[edit]
Bond valuation #Present value approach
I-spread
Dividend yield
Bond duration
Coupon rate
Compound interest
Yield to Maturity on Wikinvest
References[edit]
Jump up ^ Definition of 'Yield To Maturity (YTM)'
Jump up ^ Formulae for Calculating Gilt Prices from Yields
Jump up ^ Fabozzi, Frank. The Handbook of Fixed Income Securities. McGraw-Hill, 2012, p. 746.
Jump up ^ Fabozzi, Frank (2012). The Handbook of Fixed Income Securities. McGraw-Hill. p. 105.
Mayle, Jan (1993), Standard Securities Calculation Methods: Fixed Income Securities Formulas for Price, Yield and Accrued Interest, 1 (3rd ed.), Securities Industry and Financial Markets Association, ISBN 1-882936-01-9 . The standard reference for conventions applicable to US securities.
External links[edit]
Yield-to-Maturity and the Reinvestment of Coupon Payments
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