Question

How to calculate YTM

Answer 1

Answer :

Yield to matuirty is the the rate of return earned by the investor i fthe bond is held till maturity .

There are two ways to calculate Yield to maturity

(i.) Using Approximation Formula : Using Approximation Formula Yield to maturity is calculated as follows :

YTM = {Coupon + [(Face value - Net Proceeds) / Number of years of maturity] } / [(Face value + Net Proceeds) / 2]

For example assume Face value to be 1000 Coupon rate to be 13% (1000 * 13%) and Net Proceed from Bond 925 and years to maturity as 20

= {130 + [(1000 - 925) / 20] } / [(1000 + 925) / 2 ]

= 133.75 / 962.5

= 0.13896103896 or 13.8961039896% or 13.90%

(ii.) Using Financial Calculator to calculate exact Yield to Maturity.

Using Same data above ,

Using Financial calculator Rate function of Excel :

=RATE(nper,pmt,pv,fv)

nper is the number of years of maturity i.e 20

pmt is coupon payment i.e 1000 * 13% = 130

pv is the current market price or net proceeds i.e 925

fv is the face value i.e 1000

=RATE(20,130,-925,1000)

Yield to maturity is 14.1417%