Yield to Maturity (YTM) Calculator

YTM Formula:

\[ YTM = \frac{C + \frac{F - P}{n}}{\frac{F + P}{2}} \]

Annual Coupon Payment (C):

Face Value (F):

Current Price (P):

Years to Maturity (n):

years

Yield to Maturity (YTM):

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1. What is Yield to Maturity?

Yield to Maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It's expressed as an annual rate and considers all coupon payments and the difference between the bond's current price and its face value.

2. How Does the Calculator Work?

The calculator uses the YTM approximation formula:

\[ YTM = \frac{C + \frac{F - P}{n}}{\frac{F + P}{2}} \]

Where:

$ C $ — Annual coupon payment ($)
$ F $ — Face value of the bond ($)
$ P $ — Current price of the bond ($)
$ n $ — Years to maturity

Explanation: The numerator represents the average annual return (coupon plus capital gain/loss), while the denominator represents the average investment over the bond's life.

3. Importance of YTM Calculation

Details: YTM is a critical measure for bond investors as it allows comparison between bonds with different prices, coupon rates, and maturities. It helps investors assess whether a bond is a good investment relative to other options.

4. Using the Calculator

Tips: Enter the bond's annual coupon payment, face value, current market price, and years remaining until maturity. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Is this the exact YTM calculation?
A: This is an approximation. The exact YTM calculation requires solving a complex equation iteratively, but this approximation is often close enough for practical purposes.

Q2: What's the difference between YTM and current yield?
A: Current yield only considers the coupon payments relative to the price, while YTM also accounts for capital gains/losses if held to maturity.

Q3: Why does YTM change when bond prices change?
A: YTM and bond prices have an inverse relationship. When prices rise, YTM falls, and vice versa, because the fixed coupon payments represent a different percentage of the investment.

Q4: What does a higher YTM indicate?
A: Generally, higher YTM indicates higher risk. Bonds with higher default risk typically offer higher YTM to compensate investors for the additional risk.

Q5: Can YTM be negative?
A: Yes, in rare cases (usually during periods of very low interest rates or for bonds trading at significant premiums), YTM can be negative.