How to Calculate Bond Yields to Maturity

By eHow Personal Finance Editor

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With a little bit of math savvy - or a calculator - you can figure out how much money a bond will make for you as it matures.

Instructions

Difficulty: Moderate

Things You’ll Need:

Step1
Understand that net yield to maturity takes into account annual interest payments plus the amount of cash to be paid at maturity.
Step2
Find the amount of interest the bond pays yearly. In the case of a $1,000 bond that pays 5 percent interest, the investor will receive $50 in interest each year.
Step3
Calculate the total increase in the value of the bond annually and over the life of the bond. For instance, in an example cited by Daniel Moffat in "Concise Desk Book of Business and Finance" (out of print), if the investor pays $937.50 for a $1,000 bond that matures in 10 years, the bond's value will rise by a total of $6.25 annually or $62.50 over the life of the bond.
Step4
Figure out the average annual investment. In the example above, the bond rises in value by $6.25 each year. In an average year, that makes the bond worth $965.63.
Step5
Determine the bond's average annual yield. This is defined as the annual increase in the value of the bond plus the annual interest payment. In our example, the average annual yield is $56.25 (the $6.25 annual increase in value plus the $50 annual interest payment).
Step6
Calculate net yield to maturity by dividing the average annual yield of the bond by the average annual investment. In this example, divide $56.25 by $965.63. The net yield to maturity is 5.83 percent.

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BiggerE said

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on 1/28/2007 How do you calculate bond yield with your financial calculator

bhavi said

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on 11/18/2007 how do we calculate average annual investment of bond to arrive at Bond Yield to maturity?..

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