FutureStarr

AA Years to Maturity Bond Calculator

AA Years to Maturity Bond Calculator

Years to Maturity Bond Calculator

One of the most difficult tasks that new marketers face is how long it will take their company to mature. You could wait until your company is a decade old to get an idea. Or you could input your company's type and size to a calculator to see when it would hit that mark.

Year

via GIPHY

We can start with the current yield calculation, as that will be a much easier task. To calculate current yield, we must know the annual cash inflow of the bond as well as the current market price. The bond pays out $21 every six months, so this means that the bond pays out $42 every year. The current market price of the bond is how much the bond is worth in the current market place. You just bought the bond, so we can assume that its current market value is $965. Now that we have our two inputs to the equation, we just need to plug the inputs in and solve. The work is shown below: Now let’s take a look at how to calculate the bond’s yield to maturity. Remember, this yield assumes that all payments are paid on time and the bond is held to maturity. We must first determine the cash flows. Every six months, the bond pays out coupons of $21, and the bondholder receives these payments for three years, which means there is a total of six coupon payments, i.e. the number of periods is six. Also, at the end of three years, the bondholder receives the face value of $1,000. So, we have all of our parts for the equation, which are the bond price of $965, the coupon of $21, the number of periods of six, and the face value of $1,000. Now, we must take a shot at a guess for YTM. Let’s take a look at our equation first, however.

Yield to Maturity (YTM) – otherwise referred to as redemption or book yieldYieldYield is defined as an income-only return on investment (it excludes capital gains) calculated by taking dividends, coupons, or net income and dividing them by the value of the investment. Expressed as an annual percentage, the yield tells investors how much income they will earn each year relative to the cost of their investment. – is the speculative rate of returnRate of ReturnThe Rate of Return (ROR) is the gain or loss of an investment over a period of time copmared to the initial cost of the investment expressed as a percentage. This guide teaches the most common formulas or interest rate of a fixed-rate security, such as a bondBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period.. The YTM is based on the belief or understanding that an investor purchases the security at the current market price and holds it until the security has matured (reached its full value), and that all interest and coupon payments are made in a timely fashion.The Coupon – This is simply the interest rate on the bond. It is called a ‘coupon', because originally there would be a paper coupon attached to the bond that the owner would tear off and redeem for their interest payments. Of course, these days most interest payments are tracked, and paid, electronically. Still, the term persists. The coupon is expressed as a percentage of the bond's face value. So, a 10% coupon on a $10,000 bond would pay an annual interest of $1000. Again, these payments are often staggered throughout the year, so a bond holder's interest might be paid in biannual or quarterly installments. (Source: www.mortgagecalculator.org)

Rate

via GIPHY

In either situation, there is not an easy way to calculate YTM. You can either take a “plug and chug” approach, or you may use a calculator. It may seem an obvious choice to most, but for those looking for more of a challenge, the “plug and chug” approach is an interesting exercise. There are also a few clues that can point us to good starting values so that we aren’t simply guessing, although that works as well. If we want to be smart about our first guess, we can take a look at the current bond price compared to the face value of the bond. If the current market price is less than the face value, then the bond is said to be selling at a discount. Contrarily, if the current market price is greater than the face value of the bond, then the bond is said to be selling at a premium. Intuitively, if the bond is selling at a discount, then we know that the YTM is going to be greater than the coupon rate, and if the bond is selling at a premium, then the YTM is going to be less than the coupon rate. A third situation is that when the current market price is equal to the face value. This would imply that the YTM is equal to the coupon rate. To understand these concepts, think about plugging different rates into the first form of the YTM equation. If the YTM is greater than the coupon rate, then the denominator of each cash flow will increase, so the sum of those cash flows will be less than the face value of the bond (and hence will sell at a discount). If the YTM is less than the coupon rate, then the denominator of each cash flow will decrease, so the sum of those cash flows will be greater than the face value of the bond (and hence will sell at a premium).

Remember that, because our coupon payments are paid out semiannually, we must halve the YTM in our equation. We know that the price of the bond is below the face value of the bond. This means that our first guess should be above our coupon rate because the cash inflows need to be discounted more than they would at the rate required to reach the face value. Since the coupon rate is 4.2%, let’s try 5%. When you plug in 5% to YTM in the equation, the right side of the equation is $977.97. Because this is greater than the price of the bond, we need to guess something higher than 5%. Let’s try 5.5%. When you plug in 5.5% to YTM in the equation, the right side of the equation is $964.49. This is close, but it is below $965, so we need to guess a value lower than 5.5%. After a few iterations, you will see that 5.481% gives you a value very close to $965. This means that our yield to maturity is 5.481%. (Source: www.calculatestuff.com)

 

Related Articles