Calculate Simple Yield To Maturity

Simple yield to maturity calculation

Simple yield to maturity (SYTM) may be the approximate annual rate of interest where a bond yields exactly the same return, provided the investor supports the bond until maturity and receives all the coupon obligations. You can't compute the rate of interest manually while using exact equation for yield to maturity (YTM), as that equation is simply too complex. Online bond hand calculators have calculations for fixing the precise equation. However, you are able to calculate a detailed approximation by hand utilizing a simplified equation.

Instructions

1. Call the face area worth of the text F, the cost B, the annual coupon payment C and that number N. For instance, suppose you purchase a $1,000 bond for $900, and also the bond pays $70 each year for 5 years, then F = 1,000, B = 900, C = 70 and N = 5.

2. Compute C + (F-B)/N. This is actually the average annual return from the bond. While using example above, the typical annual return is $90 since 70 + (1,000 - 900)/5 = 90.

3. Compute (F+B)/2. This is actually the average cost from the bond. While using example above, the average cost is $950 since (1,000 + 900)/2 = 950.

4. Divide the typical annual return through the average cost to get the simple yield to maturity. Since 90/950 = .0947, the approximate yield to maturity is 9.47 percent.

Tips Alerts

The exact equation for yield to maturity is C(1+R)^(-1) + ... + C(1+R)^(-N) + F(1+R)^(-N) = B, where R may be the YTM. Even when you realize the for C, F, B and N, this equation can't be solved for R. However, the straightforward yield to maturity formula provides a good approximation for R.

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