A bond’s yield to maturity (YTM) is the rate of return you can expect from it if you hold it until maturity. It is expressed as an annual percentage rate. This is pretty straightforward when you’re considering a new bond purchase since it’s on the indenture or contract provided by the issuer. On old bonds, it’s printed right on the front of the bond.
But what if you’re looking to buy or sell bonds in the aftermarket? The market price of YTM tells you the annual rate of return of any bond in the same terms. It levels the playing field. So, you can use YTM to compare bonds with different maturity dates and coupon rates.
What You’ll need
Calculating YTM can be a time consuming and complex process. Securities industry professionals use financial calculators or, better yet, YTM calculators to do the math for them. You’ll find many online.
They all require the same input from you: your bond’s face or par value, its annual percentage rate of return, the number of years left until the bond matures and the current market price of the bond. With the exception of current market price, all of this information is spelled out in the indenture.
Current Market Price Defined
The current market price of your bond is the dollar amount of its current face value plus the dollar amount of its remaining interest payments. There’s a little work involved in determining current market price, but if you use the accounting tools available online, it will only take a few minutes.
Current Face Value
If you happen to have U.S. Treasury bonds, go straight to Treasury Direct’s savings bond calculator. Plug in your bond’s series, denomination, serial number and issue date for the current value of your specific bond.
To determine current face value of other bonds, use a Present Value of 1 Table. Locate your bond’s interest rate in the top row of the table and the interest payments it has remaining in the right-hand column. The cell where these numbers meet is your bond’s present value factor. Multiply that factor by the bond’s face value, and the result is the dollar amount of your bond’s current face value.
Current Value of Remaining Interest Payments
To determine the current value of remaining interest payments, use a Present Value of an Ordinary Annuity Table. Find the current interest rate for your bond or a similar bond, with the same interest rate, maturity date and credit rating, in the top row of the table. Find the number of payments left to maturity in the right-hand column.
The cell where these numbers meet is your present value of an ordinary annuity factor. Multiply that factor by the dollar amount of one interest payment. The table has already accounted for the number of remaining interest payments, so the result is the dollar amount of your bond’s remaining interest payments.
Current Market Price and YTM
Add the current face value and the current value of remaining interest payments to get your bond’s current market price. Now you have all the data you need to use a YTM calculator. Because yield to maturity treats all bonds the same and includes the time value of money, it’s a great way to compare returns on different bonds.
References
Writer Bio
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business in addition to writing for business and financial publications such as PocketSense, Zacks and Budgeting the Nest.