How to Calculate Yield to Maturity

Thứ bảy - 27/04/2024 01:08
Yield to Maturity (YTM) for a bond is the total return, interest plus capital gain, obtained from a bond held to maturity. It is expressed as a percentage and tells investors what their return on investment will be if they purchase the...
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Yield to Maturity (YTM) for a bond is the total return, interest plus capital gain, obtained from a bond held to maturity. It is expressed as a percentage and tells investors what their return on investment will be if they purchase the bond and hold on to it until the bond issuer pays them back. It is difficult to calculate a precise YTM, but you can approximate its value by using a bond yield table or one of the many online calculators for YTM.

Calculation Help

Yield to Maturity Calculator
Part 1
Part 1 of 3:

Calculating the Approximate Yield to Maturity

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Part 2
Part 2 of 3:

Calculating the Yield to Maturity with Trial and Error

  1. Step 1 Gather the information and plug it into the formula.
  2. Step 2 Estimate the interest rate by considering the relationship between the bond price and the yield.
    You don’t have to make random guesses about what the interest rate might be. Since this bond is priced at a discount, we know that the yield to maturity will be higher than the coupon rate. Since we know that the coupon rate is 5 percent, we can start by plugging numbers that are higher than that into the formula above to solve for P.[6]
    • Remember, though, you're plugging in an estimated i for semi-annual payments. That means you'll effectively want to divide the annual interest rate by 2.
    • In the above example, begin by taking the annual interest rate up by one point to 6 percent. Plug half of that (3 percent, because payments are semi-annual) it into the formula, and you get a P of $95.
    • This is too high, since the purchase price is $95.92.
    • Talk the annual interest rate up by one more point to 7 percent (or 3.5 percent on a semi-annual basis). Plug it into the formula, and you get a P of $95.
    • This is too low, but you now know that the precise yield to maturity is somewhere between 6 and 7 percent or between 3 and 3.5 percent on a semi-annual basis.
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Part 3
Part 3 of 3:

Understanding Yield to Maturity

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