1. What is Yield to Maturity?

Yield to Maturity (YTM) is the total return anticipated on a bond or CD if held until it matures. It's expressed as an annual rate and considers both interest payments and any capital gain or loss.

2. How Does the Calculator Work?

The calculator uses the YTM formula:

Where:

• \( Face \) — Face value of the CD (USD)
• \( Price \) — Current price paid for the CD (USD)
• \( Years \) — Years remaining until maturity
• \( Interest\ Rate \) — Stated annual interest rate (decimal)

Explanation: The equation calculates the annualized return considering both the interest payments and the difference between purchase price and face value.

3. Importance of YTM Calculation

Details: YTM is crucial for comparing different fixed-income investments. It provides a standardized measure of return that accounts for price, interest payments, and time to maturity.

4. Using the Calculator

Tips: Enter the CD's face value, current price, years remaining until maturity, and annual interest rate (in decimal form). All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between YTM and coupon rate?
A: Coupon rate is the stated interest rate, while YTM considers both interest payments and any capital gain/loss from the price difference.

Q2: How does price affect YTM?
A: Buying below face value increases YTM (you gain the discount at maturity), while buying above face value decreases YTM.

Q3: What does a higher YTM indicate?
A: Higher YTM generally means higher return potential but may indicate higher risk or longer maturity.

Q4: Is YTM guaranteed?
A: YTM assumes you hold to maturity and all payments are made. Early redemption or default would change actual returns.

Q5: How accurate is this calculation?
A: This is a simplified version. More complex calculations account for compounding and exact payment timing.