1. What is Yield to Maturity?

Yield to Maturity (YTM) is the total return anticipated on a bond if held until it matures. It's the internal rate of return (IRR) of all future cash flows (coupons and principal) from the bond at its current market price.

2. How Does the Calculator Work?

The calculator solves for YTM in the bond pricing equation:

Where:

• \( P \) — Current bond price
• \( C \) — Coupon payment
• \( F \) — Face value
• \( n \) — Number of periods to maturity
• \( YTM \) — Yield to Maturity (per period)

Explanation: The calculator uses an iterative Newton-Raphson method to solve this equation numerically since there's no algebraic solution for YTM.

3. Importance of YTM Calculation

Details: YTM is a key metric for bond investors as it allows comparison between bonds with different prices, coupons, and maturities. It represents the annualized return if held to maturity and all payments are made as scheduled.

4. Using the Calculator

Tips: Enter bond price (without $ sign), face value, annual coupon rate (as percentage), years to maturity, and coupon frequency. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between YTM and current yield?
A: Current yield only considers the coupon payments relative to price, while YTM accounts for all cash flows including the final principal payment.

Q2: Why does YTM change when bond price changes?
A: YTM is inversely related to price - when bond prices fall, YTM rises, and vice versa, all else being equal.

Q3: What assumptions does YTM make?
A: YTM assumes all coupons are reinvested at the same rate and the bond is held to maturity with no default.

Q4: How does coupon frequency affect YTM?
A: More frequent coupon payments (e.g., semi-annual vs annual) result in slightly higher effective annual yield due to compounding.

Q5: Can YTM be negative?
A: Yes, in rare cases where bond prices are extremely high (often seen in negative interest rate environments).