Yield To Maturity Calculate

Calculating yield to maturity under the "rule of thumb" method is not difficult. The concept with it is the YTM is based on the Nominal Yield, Price and the years to maturity. So, the formula or calculation is based on that.

Premium bonds have a lower yield to maturity vs. the nominal rate. That is because the nominal yield only pays to par value. Thus if the bond was bought above par, the premium amount does not earn interest and the premium is not paid at maturity. The investor is losing the above par amount at the end of the term. If the investment was sold beforehand at a profit - the cost would be a profit.

Example

A 5% bond was purchased at $1150 and the maturity is 15 years. Calculating YTM would be based on all of this information. The total premium amount is $150 - divided over 15 years would give you $10 per year. That is the amount that is basically lost each year on the price - if held to maturity.

The way the formula is calculated is you take the yearly real interest - which is $50 and then subtract the lost above par yearly price of $10. This leaves you with a real yearly return of $40. Then divide $40 by the average price of the bond during it's life. Since par ($1000) is the redemption price and $1150 was the price that was paid - the median price would be $1075.

So $40 divided by $1075 would be the YTM = 3.72%

Discount bonds are calculated the same way - except the yearly discount is added on to the nominal interest payments. This would result in a higher YTM calculation.

http://www.aitraining.com/ytm.htm

Current Yield

A bond's current yield can be found by dividing the coupon or nominal by the current market price of the security. It is not an overly important yield to investors - as it is always changing and is most important if someone is pricing the bond to sell. If an investor is holding the security to maturity - then the current yield is not a big concern.

A debt that is priced above par (premium) will have a lower current yield vs. the nominal. A 7% corporate debenture priced at $102 will have a current of 6.86% ($70 divided by $1020). Discounted bonds will have a higher current yield than it's coupon rate.

http://www.aitraining.com/currentyield.htm

Nominal Yield

The fixed interest rate on a bond is known as it's nominal yield or coupon rate. This is the rate that the issuer pays to investors. It is fixed, never changes and is paid to par value only.

Since the nominal yield is fixed, during times of lower current interest rates - bonds with high nominal rates will be priced at a premium. If a 7% bond is trading while interest rates are only 5%, bond brokers and traders will price the bond above par, which will give the security a lower yield to maturity.

High nominal coupons provide good current income, since that is the amount that is paid in internest to the bondholder. However that interest money is only paid to par value - so the nominal yield provides part of a bond's return.

When interest rates are lower, new offerings will come out at lower nominal rates. When yields are higher - new issues come out higher. It is in the secondary market that bonds will normally trade above or below par, based on the interest rate picture on similar bonds and the nominals that they are at.

http://www.aitraining.com/bondyield.htm

Yield Basics

Bonds are priced to offer an effective yield to investors. Since fixed income securites are sold in par value amounts, the pricing of these bonds will effect the overall yield an investor gets.

Although you may receive a high coupon rate paid to par (nominal rate), if a premium was paid, your overall yield to maturity will be lower than the coupon rate. This is normal, as the coupon cannot be changed, but interest rates do change. The only think the market or a bond trader can do is re-price these bonds to current interest rate levels. That adjustment will be reflected in the current and yield to maturity.