 • Table of Contents • Introduction • 1-Time Value • 2-Risk/Return • 3-Accounting • 4-Securities • 5-Business • 6-Regulatory • Case Studies • Student Papers ## 4.2.4 Yield to Maturity

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 (B0)
• 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 semi-annually, 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 semi-annually, 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%
 This page was last updated on: March 30, 2004