How to Calculate Bond Yields to Maturity

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:

• Financial Calculator
• Paper And Pencils

1. Understand that net yield to maturity takes into account annual interest payments plus the amount of cash to be paid at maturity.
2. 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.
3. 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.
4. 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.
5. 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).
6. 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.