This yield to maturity calculator approximates a bond’s yield to maturity by considering its annual coupon payment, its face value & current clean price and the no. of years. There is in depth information on how to determine this indicator below the tool.
How does this yield to maturity calculator work?
This is a financial application designed to compute the yield to maturity in case the following data is provided:
- Annual coupon/ interest payment (ACP) in absolute value (NOT as a rate).
- Bond’s face value (BFV) which is the nominal value.
- Bond's current clean price (CCP).
- Years to maturity (N).
The algorithm behind this yield to maturity calculator applies this formula:
~ Yield To Maturity (YTM) = (ACP + (BFV - CCP) / N) / ((BFV + CCP) / 2)
Understanding the concept of the yield of maturity
In finance theory, the YTM represents the rate of return forecasted on a bond if held until its maturity. While it helps investors analyze and compare multiple bonds with specific values of the coupons and maturities, this is a function that accounts the bond’s nominal value, its current market price, coupon interest rate and its lifetime as explained above.
In regard of the interpretation of its levels is should be mentioned that the higher the YTM is the better, as that indicates a high profitability of the bonds.
A bond’s coupon rate (which is the rate for the yearly payment received by the holder) compared to its YTM may indicate by case one of the following situations:
- In case a bond's coupon rate > YTM, THEN the bond is selling at a premium.
- In case a bond's coupon rate = YTM, THEN the bond is selling at par.
- In case a bond's coupon rate < YTM, THEN the bond is selling at a discount.
Example of a calculation
Let's assume a bond with the following characteristics:
- face value = $100,000
- current clean price = $140,000
- yearly coupon payment = $10,000
- years to maturity = 10. Will result in a YTM of 5%.16 Feb, 2015 | 0 comments