Yield to maturity is the expected or anticipated rate of return on a bond if it is held until the maturity date. Many investors do not understand yield to maturity and how it is calculated. There are various factors used to calculate the yield to maturity, the calculation involves the current market price, coupon interest rate, par value and time to maturity. It is considered as a long-term bond yield expressed as an annual rate. The yield to maturity is an assumption that the bond will be held until maturity, that all the principle and coupon payments will be made and coupon payments will be reinvested at the bond’s promised yield at the same rate as invested. In other words, it is a measurement of the return of the bond.
Through complex calculations involving trial and error, the approximate yield can be found. The calculation of yield to maturity is quite identical to the calculation of internal rate of return:
>If the current yield value of the bond is equal to its yield to maturity, then the bond is selling at par.
>If the bond’s current yield is more than its yield to maturity, then the bond is selling at a premium.
>if the current yield value of the bond is less than its yield to maturity, then the bond is selling at a discount.
With the help of a bond yield table one can find the approximate yield to maturity. However, as stated earlier, it requires lot of calculations, mainly on trial and error basis. It is complex and it usually requires a programmable business calculator. It can also be done with the help of a computer program to get the approximate value. The best person to help you understand yield to maturity will be your financial planner and adviser.
About Author: Pauline Go is an online leading expert in finance industry. She also offers top quality finance tips like :
Bond Broker Phone Number And Address Directory,
What is Bond Convexity,
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