Bond investors calculate bonds' current yield and yield to maturity to determine their worth relative to other bonds on the market. Using bonds' par value, market price, interest rate and maturity date, you can determine a bond's current and future yield as a percentage of your original investment. This can help you to determine when to sell or hold bonds, and which bonds to purchase to maximize your capital gains.
Consult the bond indenture agreement to find the bond's par value and annual interest rate. The par value is the dollar amount originally paid for the bond. Determine the bond's current market price — the price at which bonds with similar maturities and credit ratings are trading in the marketplace.
Multiply the bond's annual interest rate by its par value to determine the annual coupon payment — the dollar amount of interest paid each year.
Determine the bond's years to maturity by subtracting the bond's age from its original maturity. For example, a three-year-old bond that pays interest for 10 years will have seven years left until maturity.
Use the following formula to compute current yield:
( ( annual coupon payment / market price ) * 100 ) + ( ( par value – market price ) / years to maturity )
Use a free, online calculator to determine a bond's yield to maturity (YTM). Since the manual calculation for yield to maturity involves numerous iterations and guesswork, investors generally find YTM calculators to be a more reliable method of determining yield. Enter the bond's market price, par value, interest rate and years to maturity in a YTM calculator to determine the yield to maturity.
Use the following formula if you wish to tackle the YTM calculation on your own:
market price = ( coupon payment of period 1 / ( 1 + YTM ) ^ 1 ) + ( coupon of period 2 / ( 1 + YTM ) ^ 2 ) …. ( coupon of period N / ( 1 – YTM ) ^ N
Repeat the computation for all periods up to the last period, N. After plugging all other variables into the equation, solve for YTM by using trial and error for a range of interest rates to see which rate makes the equation true.
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