How to Calculate the Fair Market Price of a Bond Yield to Maturity

How to Calculate the Fair Market Price of a Bond Yield to Maturity

How to Calculate the Fair Market Price of a Bond Yield to Maturity

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. 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. 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. The result is the dollar amount of your bond’s remaining interest payments.

Current Market Price and Yield to Maturity

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.

Items you will need

  • Calculator

Video of the Day

Brought to you by Sapling
Brought to you by Sapling
 

About the Author

LeDona Withaar has over 20 years’ experience as a securities industry professional and financial manager. She has owned and operated her own business and done volunteer work in corporate development for non-profit organizations such as the Boston Symphony Orchestra. LeDona has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She is currently a teacher and horse rancher.