Yield to Maturity
What is Yield to maturity (YTM)?
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield, but is expressed as an annual rate. The yield to maturity is calculated by taking into account the current market price, par value, coupon interest rate and time to maturity.
How to calculated Yield to maturity?
To calculate the yield to maturity on a bond, you need the following information:
- The bond's face value (also known as the par value)
- The bond's current market price
- The bond's coupon rate
- The number of years until the bond matures
Once you have this information, you can use the following formula to calculate the yield to maturity:
YTM = [(F - P) / P(1 + YTM)] x (1 / n) + YTM
where:
- F is the bond's face value
- P is the bond's current market price
- YTM is the yield to maturity
- n is the number of years until the bond matures
To use this formula, you need to solve for YTM by using an iterative approach. This means that you will need to make an initial guess at the yield to maturity, then plug that value into the formula and see if it produces the correct result. If it does not, you will need to adjust your guess and try again until you find a value for YTM that produces the correct result.
