How Yield to Maturity is Calculated With Example
The yield to maturity (YTM) is a measure of the total return an investor can expect to receive from a bond or other fixed-income security if it is held until its maturity date. It takes into account the bond’s current market price, its face value (par value), the coupon payments it offers, and the time remaining until maturity. The formula to calculate YTM is a bit complex, but I’ll break it down for you step by step with an example.
Suppose you have a bond with the following details:
| Bond Details | Values |
|---|---|
| Face Value (F) | ₹10,000 |
| Annual Coupon Payment (C) | ₹500 |
| Current Market Price (P) | ₹9,500 |
| Years to Maturity (n) | 5 years |
| Calculation Steps | |
|---|---|
| (F−P)/n | ₹100 |
| (F+P)2 | ₹9,750 |
| YTM Formula | |
| (C+((F-P)/n))/((F+P)/2) | |
| Substitute Values | |
| (500+100)/9750 | |
| Simplify | |
| 600/9750 | |
| 0.06154 | |
| Convert to Percentage | |
| 6.154%YTM=6.154% |
So, the yield to maturity for this bond in INR terms is approximately 6.154%.
So, the yield to maturity for this bond in INR terms is approximately 6.154%. This means that if you buy the bond at the current market price of ₹9,500 and hold it until maturity (5 years), you can expect an annualized return of approximately 6.154% on your investment.
YTM is a crucial metric for investors as it helps evaluate the profitability of a bond investment considering factors like coupon payments, purchase price, and time to maturity.
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