Yield to Maturity of a Coupon Bond (includes calculator)
The yield to maturity (YTM) is the yield offered to a bondholder if the bond is held to maturity. As such, it is a measure of the return of the bond. YTM is expressed as an annual rate for which the calculation includes the current market price for the bond, its par value, coupon rate, and its time to maturity. It is assumed that coupons are reinvested at the same rate.
How to use Yield to Maturity
Looking at the yield to maturity enables investors to compare a bond’s expected return against other investment opportunities. It is also helpful that the bond investor understand the relationship between yields and market prices (e.g. yields rise when bond prices fall and vice versa).
Some additional basics:
- If the coupon rate is less than its YTM, the bond is selling at a discount (less than its par value)
- If the coupon rate is greater than its YTM, the bond is selling at a premium (greater than its par value)
- If the coupon rate is equal to its YTM, the bond is selling at par
Note for using the calculator: If the bond is not callable, enter the par value in both the par value and the call value fields.
Callable Bonds
A callable bond is a bond that gives the issuer the opportunity to redeem the bond before it reaches maturity. Callable bonds require special consideration regarding YTM as the call possibility limits the bond’s potential price appreciation. If interest rates fall, the bond’s price will not go higher than its call price. A callable bond’s more accurate yield then is its “yield-to-call” (which will be lower than its YTM). Investors usually consider the lower value between the yield-to-call and the yield-to-maturity as the better indication of the return on a callable bond.
While an approximate YTM can be found by using a bond yield table, a YTM calculator will deliver a more precise vale.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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