1. What is Yield to Maturity (YTM)?

Yield to Maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It is expressed as an annual rate and considers all coupon payments and the difference between the bond's current market price and its face value.

2. How Does the Calculator Work?

The calculator uses the Internal Rate of Return (IRR) method:

Where:

• Cash Flows — Series of cash flows including purchase price (negative) and coupon payments (positive)

Explanation: The IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

3. Importance of YTM Calculation

Details: YTM is a crucial measure for bond investors as it allows comparison between different bonds and helps in making informed investment decisions based on expected returns.

4. Using the Calculator

Tips: Enter cash flows as comma-separated values. The first value should be the purchase price (negative), followed by coupon payments (positive), and the final payment including face value.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between YTM and current yield?
A: Current yield only considers annual coupon payments relative to the bond's price, while YTM accounts for all future cash flows including the face value at maturity.

Q2: How accurate is this calculator?
A: This calculator provides a good approximation using the IRR method. For precise calculations, professional financial tools are recommended.

Q3: Can YTM be negative?
A: Yes, in rare cases where the bond's purchase price is significantly higher than the sum of its future cash flows.

Q4: What factors affect YTM?
A: Market interest rates, bond's credit quality, time to maturity, and coupon rate all influence YTM.

Q5: Is YTM the same as bond's return?
A: YTM is an estimated annual return assuming the bond is held to maturity and all coupons are reinvested at the same rate.