Yield to Maturity

Useful Bond Calculations

Yield to Maturity (YTM) or redemption yield of a bond is the rate of return an investor will receive on their investment once a bond reaches its maturity date.

The yield of a bond is the amount an investor earns on a security, over the specified period of the bonds life. This amount is made up of the interest or dividend earned on security, and is usually expressed as a percentage of the face value or the current market value of this security; paid out on an annual basis.

Finding the YTM of a security is an intricate process and the following factors must be taken into account:

  • Current Market Price
  • Par Value
  • Coupon Interest Rate
  • Time to maturity

While the calculation is complex, the following formula may be used to find out its approximate value:

Where: C – Interest/coupon payment

  • FV – Face value is the nominal or face value of a security or coupon as indicated on a security’s certificate. It is a fixed value determined at the time of issuance and unlike market value, it doesn’t fluctuate on a regular basis
  • PV – Present value/price of the security
  • t – The amount of time it takes the security to reach maturity
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