A bond's yield to maturity (YTM) is the interest rate that would yield the bond's total return from the price that you pay for it. This is different from the bond's stated coupon rate, because you may buy a bond at a price different from its par value. You cannot calculate the YTM using direct mathematics, but you can with a spreadsheet, a program or a financial calculator. With some bonds, you must consider capital gains tax, which reduces your return. You need not with tax exemptions, such as those that occur with tax-exempt municipal bonds.
Multiply the bond's par value by its coupon. For example, if you have bought a 10-year, $950 bond that pays an 8-percent annual coupon, multiply $950 by 0.08, giving $76, the payment per period.
Press the calculator's "PMT" button.
Enter the payment per period, which is in this case "76."
Press the calculator's "N" button.
Enter the number of periods before the bond matures. With this example, type "10," the number of years until the bond matures.
Press the "PV" button.
Press the "-" sign, followed by the price you pay for the bond. For example, if you pay $800 for the bond, enter "-800."
Press the "FV" button.
Enter the bond's par value, which in this case is "950."
Press the "1/yr" button.
Press the "compute" or "=" key. The calculator will display the bond's yield to maturity, which in this case is 5.55 percent.
- If you do not have a financial calculator, use one online. Some specifically calculate yield to maturity.
Items you will need
- Financial calculator
- Fundamentals of Financial Management; Eugene F. Brigham and Joel F. Houston
- Fixed Income Securities: Tools for Today's Markets; Bruce Tuckman