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How To Calculate Yield To Maturity

Yield to maturity (YTM) is the total return expected from a bond if held until maturity. To calculate YTM: 1) Gather information like purchase price, face value, maturity date, coupon rate. 2) Calculate the discount/premium by subtracting purchase price from face value. 3) Divide the discount by years to maturity to get annualized capital gain. 4) Add annualized capital gain to annual interest to get annualized return. 5) Divide annualized return by purchase price for yield. Average this with another yield calculation to get YTM.

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Sunil Kumar
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361 views

How To Calculate Yield To Maturity

Yield to maturity (YTM) is the total return expected from a bond if held until maturity. To calculate YTM: 1) Gather information like purchase price, face value, maturity date, coupon rate. 2) Calculate the discount/premium by subtracting purchase price from face value. 3) Divide the discount by years to maturity to get annualized capital gain. 4) Add annualized capital gain to annual interest to get annualized return. 5) Divide annualized return by purchase price for yield. Average this with another yield calculation to get YTM.

Uploaded by

Sunil Kumar
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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How to Calculate Yield to Maturity

Three Parts: Calculation Help Gathering Bond Information Calculating Yield to


Maturity

Yield to Maturity (YTM) for a bond is the total return, interest plus capital gain,
obtained from a bond held to maturity. It's 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.

Part 1 of 2: Gathering Bond Information

Find the purchase price of a bond. This should be easy to find because it's
one of the first things that will be advertised about a bond. It's the advertised
market price for the bond.

Identify the face value of the bond. Note that the face value of a bond will be
different than its purchase price. The face value is how much money you'll
receive for the bond when it reaches maturity. The face value of a bond is
often referred to as its "par value.

Find the remaining years to maturity. If the bond matures in 2020 and it's
currently 2015, then there are five years (2020-2015) to maturity.

The maturity date is when the borrower will pay you the face value of the bond

Identify the annual interest of the bond in dollars. The bond interest rate (or
coupon rate) will be expressed as a percentage (for example, 10%). You'll
need to calculate the dollar amount of the annual interest by multiplying that
percentage times the par value of the bond.
For example, if the annual interest is 10% and the par value of the bond is
$1,000, then the annual interest is 10% x $1,000 or $100.

Part 2 of 2: Calculating Yield to Maturity

Subtract the purchase price ($900) from the par value ($1000) the result is a
discount/premium.
$1000 - $900 = $100 discount

Part 3 of 2: Calculating Yield to Maturity

Divide the Discount with (100) by the remaining years of maturity of the bond
.we arrive the annualized capital gain (20).
Add the annualized capital gain ($20) to the yearly interest ($50). This gives
us the total annualized return of $ 70.

$ 1000 - $ 900 = $ 100

$100 / 5 = $20
$50 + $ 20 = $70

Divide the annualized return ($70) by the purchase price ($900). This gives us
the yield of 7.78%

$70/$900 = 7.78%

Subtract the annualized Capital gain from the par value ($1000).We get
difference of $ 980.

$1000 - $ 20 =$980

Divide the annualized return ($70) by the result from the previous step ($980)
. The result is Yield B = 7.14%

$70 / $ 980 = 7.14%

Average the two Yields, Result is yield to maturity (YTM).

7.78% + 7.14%
2

= 7.46%

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