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Bond Yield To Maturity (YTM) Formulas

There are three common measures of the annual return on a bond investment: the coupon rate, current yield, and yield to maturity (YTM). The YTM considers both interest payments and potential capital gains or losses over the life of the bond. To calculate YTM, the present value of all cash flows is set equal to the current market price using the present value equation. Solving the present value equation for the discount rate yields the YTM. An example calculates the 8.55% YTM for a bond selling at $950 with a $1,000 par value, 7% coupon rate, and 4-year maturity.

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3K views2 pages

Bond Yield To Maturity (YTM) Formulas

There are three common measures of the annual return on a bond investment: the coupon rate, current yield, and yield to maturity (YTM). The YTM considers both interest payments and potential capital gains or losses over the life of the bond. To calculate YTM, the present value of all cash flows is set equal to the current market price using the present value equation. Solving the present value equation for the discount rate yields the YTM. An example calculates the 8.55% YTM for a bond selling at $950 with a $1,000 par value, 7% coupon rate, and 4-year maturity.

Uploaded by

Izzy B
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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 (𝐾𝑑 ), 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:
𝐈 𝐌𝐕
𝐏𝟎 = ∑𝐧𝐭=𝟏 (𝟏+𝐊 )𝐭
+ (𝟏+𝐊 𝐝 )𝐧
= I(𝐏𝐕𝐈𝐅ᴀ𝐊𝐝,𝐧 ) + 𝐌𝐕(𝐏𝐕𝐈𝐅𝐊𝐝,𝐧 )
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× = $𝟕𝟎
𝟏𝟎𝟎

- 𝐏𝟎 = I(𝐏𝐕𝐈𝐅ᴀ𝐊𝐝,𝐧 ) + 𝐌𝐕(𝐏𝐕𝐈𝐅𝐊𝐝,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= = = 0.0255
100 100

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

3) Current yield = 𝑲𝒅 = 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

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