Bond investors commonly look at yield to
maturity (YTM)  the rate of return the
bond offers at a specified price, if held to maturity.
By computing bonds' YTM, it is possible to compare
bonds with different coupon rates and prices.
A bond's YTM can be calculated by using the bond
pricing formula and solving for the discount rate.
If you know 
 current price (B_{0})
 annual interest (I)
 par value (M)
 years to maturity (n)
the yield can be found. Business calculators
can make the calculation. Or you can use a process
of trial and error with a spreadsheet. 
Example
1
A 10.3% bond (par $1,000) sells for $1,090. That
is, it trades at a premium. Assuming interest
is paid semiannually, and the bond has 7 years
to maturity, what is the bond's current yield?
Answer. You can use a spreadsheet
(computing yield either by trial and error until
present value equals $1090, or using a "goal
seek" function):
Trading
at premium 
Interest 
10.3% 
Years to maturity 
7 
Par (principal) 
$1000.00 
Present value 
$1090.00 
Remaining interest payments 
$534.01 
Principal payment 
$555.99 
Yield (discount rate) 
8.56% 
Example 2
Assume the same 10.3% bond (par $1,000) sells
for $890. That is, it trades at a discount. Assuming
interest is paid semiannually, and the bond has
7 years to maturity, what is the bond's current
yield?
Answer: You can use the same
spreadsheet (computing yield either by trial and
error until present value equals $890, or using
a "goal seek" function):
Trading
at discount 
Interest 
10.3% 
Years to maturity 
7 
Par (principal) 
$1000.00 
Present value 
$ 890.00 
Remaining interest payments 
$468.20 
Principal payment 
$421.80 
Yield (discount rate) 
12.72% 
