How to Figure Yield to Maturity on Bonds
Using yield to maturity--YTM--is the most accurate way to compare the expected returns from different bonds. The YTM is the annual rate an investor will earn if a bond is purchased at the current market price. This yield calculation adjusts for premium or discount bond prices to provide an accurate return forecast.
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Instructions
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Collect the required bond data to calculate YTM. You need the current market price, the face value of the bond, the coupon yield and the years until the bond matures or the maturity date. The coupon yield is the rate of interest the bond pays based on the face amount.
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Locate an online yield-to-maturity calculator. The YTM calculation is a complex calculation requiring repeated steps as the bond moves through time. A YTM calculator is programmed to make the calculation steps. Several online YTM calculators are available (see Resources).
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Enter the bond data in the YTM calculator in the appropriate places. For a test example, use a bond with a current price of $10,125; a face amount of $10,000; a 6 percent coupon and a maturity date in 10 years. The YTM for this bond is 5.84 percent using the Morningstar YTM calculator.
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Tips & Warnings
Premium bonds will have a yield to maturity less than the coupon rate and discount bonds will have a YTM greater than the coupon rate.
Bond prices are quoted as a percentage of par. If you have a bond quote of 99.835 or 100.550, just use this bond price and 100 as the par or face value. This works for any size bond.
The YTM calculators that require exact dates will be a little more accurate than calculators that just take years to maturity.
Settlement date is bond-speak for the official date of purchase of a bond. It is three business days after you buy the bond. Settlement date is the day the bond buyer starts earning interest.
A bond yield-to-maturity calculation is the rate an investor will earn if the bond is held to maturity and the interest payments can be reinvested at the same rate. The actual rate of return is dependent on how long the bond is owned and what is done with the interest payments.
References
Resources
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