- Sources of Return from Investing in a Bond
- How to Calculate Current Yield
- How to Calculate Yield to Maturity
- Bond Equivalent Yield Convention
- Yield to Maturity (YTM) Approximation Formula
- YTM and Reinvestment Risk
- Factors Affecting Reinvestment Risk
- Calculate Bond-Equivalent Yield of Annual-Pay Bonds
- How to Calculate Yield to Call of a Bond
- Cash Flow Yield
- Bootstrapping Spot Rate Curve (Zero Curve)
- How to Price a Bond Using Spot Rates (Zero Curve)
- Nominal Spread
- Z-Spread: Definition and Calculation
- Option-adjusted Spreads (OAS)
- What are Forward Rates?
- How to Calculate Forward Rates from Spot Rates?
- How to Value a Bond Using Forward Rates
Yield to Maturity (YTM) Approximation Formula
Calculating yield to maturity can sometimes be a tedious process because we need to do trial and error to arrive at the exact yield.
In this article we provide an approximation formula to calculate YTM that you can use for quick calculation. The following formula assumes semi-annual coupon payments.
Where:
- F = Face Value = Par Value (Usually $1,000)
- P = Bond Price
- C = the semi-annual coupon interest
- N = number of semi-annual periods left to maturity
Let’s take an example to understand how to use the formula. Let us find the yield-to-maturity of a 5 year 6% coupon bond that is currently priced at $850. The calculation of YTM is shown below:
Note that the actual YTM in this example is 9.87%. However, our approximation is good enough for exams or for quick comparisons.
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