Home
Back
YTM Calculation Using RATE Function:
| From: | To: |
Yield To Maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It's expressed as an annual rate and considers all coupon payments and the difference between the bond's current market price and its face value.
The calculator uses the RATE function formula:
Where:
Explanation: The RATE function calculates the interest rate per period of an annuity. For YTM calculation, it finds the discount rate that equates the present value of future cash flows to the current bond price.
Details: YTM is a crucial metric for bond investors as it allows comparison between different fixed-income securities. It helps investors assess the true return on a bond investment, considering both coupon payments and capital gains/losses.
Tips: Enter the number of periods until maturity, periodic coupon payment amount, current bond price (PV), and face value (FV). All values must be positive numbers.
Q1: What's the difference between YTM and current yield?
A: Current yield only considers annual coupon payments relative to current price, while YTM includes both coupon payments and any capital gain/loss if held to maturity.
Q2: Does YTM assume reinvestment of coupons?
A: Yes, YTM assumes that all coupon payments are reinvested at the same rate as the current YTM.
Q3: How does bond price affect YTM?
A: When bond price is below face value (discount bond), YTM is higher than the coupon rate. When price is above face value (premium bond), YTM is lower than the coupon rate.
Q4: What are the limitations of YTM?
A: YTM assumes the bond is held to maturity and that all coupons are reinvested at the same rate, which may not reflect real market conditions.
Q5: How often should YTM be calculated?
A: YTM should be recalculated whenever market conditions change significantly or when considering new bond investments.