How to Calculate a Bond's YTM
A bond's YTM, or yield to maturity, is a way to calculate your potential return when investing in a bond. Unless you buy a newly issued bond, you will most likely buy it for more or less than its face (par) value and you probably won't hold it to maturity. Therefore, your actual rate of return might be higher or lower than the coupon rate (stated annual interest rate). Yield is always expressed as a percentage.
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Things You'll Need
- Years until maturity
- Calculator or financial calculator (optional)
- Annual coupon amount
- Current price of bond
Instructions
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Find a Bond's Yield to Maturity
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1
Realize you can expect a greater yield when you purchase a bond at a lower price and a lower yield when you purchase it at a higher price. For example, a $1,000 bond that pays $100 in interest will have a 10 percent yield. If you pay $1250 for the same bond, with the same amount of interest, your yield will be 12.5 percent.
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Know that yield to maturity measures a bond's yield from the day you buy it until its maturity date, the date when you redeem the bond for its full principal.
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Remember that YTM accounts for annual interest rates as well as the bond's face value, which is the amount the bond will pay at maturity. It also includes the amount of time that you keep the bond before selling it.
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Use the online YTM calculator available at Investopedia.com to compute your YTM (see Resources below).
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Talk to your broker or other financial advisor if you find this too difficult to calculate on your own. He or she will be able to answer your questions or help you evaluate the long-term potential of your own portfolio or the bonds you are considering buying.
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Recognize that bond funds do not have yields to maturity because they are made up of bonds with different rates and terms. The diversified content of bond funds helps reduce volatility. Bond funds have no fixed interest rates or maturity dates but they do have current yields.
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Tips & Warnings
Recognize that when investors discuss a bond yield, they are usually referring to the yield to maturity. But you should also be aware that there are different ways to calculate expected rates of return.
