Bond Yield to Maturity Calculation

Cheap bonds with high coupons produce high yields to maturity.

Cheap bonds with high coupons produce high yields to maturity.

The yield to maturity of a bond is a hypothetical interest rate that you can apply to the bond's price. If you invest the value of the bond's price at the yield to maturity for the term of the bond, you will receive returns equal to your total returns from buying the bond. This yield takes into account two values that determine the bond's return -- the bond's annual rate of return -- or coupon -- and the difference between its face value and price.

Multiply the bond's face value by its coupon. For example if a $2,000 bond produces 7.5 percent returns each year, multiply $2,000 by 0.075 to get $150, the annual dividend.

Press "PMT" on a financial calculator and enter the bond's annual dividend, which is "150" in this example.

Press "N" on the calculator and enter the number of years in the bond's term. For example, if the bond will mature in five years, press "5."

Press "PV" on the calculator, press the "-" button and then enter the bond's price. For example, if you pay $1,500 for the bond, enter "1500."

Press "FV" on the calculator and enter the bond's face value, which is "2000" in this example.

Press "1/yr" on the calculator and press the "Enter," "=" or "Compute" button to calculate the yield to maturity. In this example, the bond has a 12.7 percent yield to maturity.

Items you will need

  • Financial calculator
 

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Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.

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