Scribd
Upload
3K views2 pages

Bond Yield To Maturity (YTM) Formulas

This document discusses bond yield to maturity (YTM) formulas and provides an example calculation. It defines coupon rate, current yield, and YTM. YTM is considered the best return measure as it incorporates all aspects of the investment, including coupon payments and capital gain/loss. The document explains how to calculate YTM using the present value equation, and provides a worked example to find the YTM of a bond selling at a discount price of $950 with a $1,000 par value and 7% coupon rate maturing in 4 years. The calculated YTM is 8.55%.

Uploaded by

Izzy B
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
3K views2 pages

Bond Yield To Maturity (YTM) Formulas

This document discusses bond yield to maturity (YTM) formulas and provides an example calculation. It defines coupon rate, current yield, and YTM. YTM is considered the best return measure as it incorporates all aspects of the investment, including coupon payments and capital gain/loss. The document explains how to calculate YTM using the present value equation, and provides a worked example to find the YTM of a bond selling at a discount price of $950 with a $1,000 par value and 7% coupon rate maturing in 4 years. The calculated YTM is 8.55%.

Uploaded by

Izzy B
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Bond yield to Maturity (YTM) Formulas

- There are numbers commonly used to measure the annual rate of return
on an investment, they are:
1) Coupon Rate: It is the annual payment as a percentage of the bond's
par value.
2) Current yield: It is the annual payment as a percentage of the current
market price it will be paid.
3) Yield to Maturity: It is a composite rate of return of the payments,
coupon and capital gain or (loss).
- The capital gain or (Loss) is the difference between par value and the price
you actually pay.
- The Yield to Maturity (YTM) is the best measure of the return rate, Since it
include all aspects of your investment.
- To calculate (YTM) we use the present value equation.
- Whatever is the discount rate ( K d ¿, we have to use it to calculate the
present value of all payments and then add up these present values, the
sum will equal the initial investment.
- The equation is:
n
I MV
P 0= ∑ t
+ n = I( PVIFᴀKd , n ¿+ MV (PVIF Kd ,n )
t =1 ( 1+ K d ) ( 1+ K d )
K d =YTM

1) Bond is selling at Discount: Coupon Rate < Current yield < YTM
2) Bond is selling at premium : Coupon Rate > Current yield > YTM
3) Bond is selling at par value: Coupon Rate = Current yield = YTM

1
Written by Dr. Khdija Harery
Typed by Yusra Noorwali
Example on (YTM)
- Suppose your bond is selling for $950, and has a coupon rate of 7%, it
mature in 4 years, and the par value is $1,000 , what is the YTM?
7
- 1) The coupon payment is = 1,000× 100 =$ 70

- P0=¿ I( PVIFᴀKd , n ¿+ MV ( PVIF Kd ,n )

= 70(3.465) + 1,000(0.792)
6% , n=4

= 242.55 + 792 = 1,034.55 ≈ 1,035

P0=¿ 70(3.240) + 1,000(0.708) 9% , n=4

= 226.8 + 708 = 934.8 ≈ 935

6% 1035

X 85
0.03 100

YTM 950

9% 935
X 85
=
0.03 100

( 85 ) (0.03) 2.55
X= 100
=
100
=0.0255

2) YTM = 0.06 + 0.0255 = 0.0855 = 8.55%

3) Current yield = K d = I/V = 70 / 950 = 7.3%

YTM = 8.55%

Current yield = 7.3%

Coupon rate = 7%
2
Written by Dr. Khdija Harery
Typed by Yusra Noorwali

You might also like