The Ins and Outs of Bond Yield
Step 3: How Is Yield to Maturity Calculated?
Yield to maturity (YTM) calculations are not easily made using paper and pencil, but they can easily be determined using either a financial calculator, or by using the various calculators available on the Internet.
What Determines the Return on My Bond?
Why Are There Different Bond Yields?
How Is Yield to Maturity Calculated?
What Makes Up My Bond's Total Return?
Do Bond Funds Have a Yield to Maturity?
How Should I Interpret My Bond's Reported Return?
YTM is the measure most widely quoted by brokers when selling individual bonds. However, it is not a prediction of what you will actually earn on a bond. Your actual return is likely to differ from the YTM, perhaps considerably, because the YTM will only be realized under certain conditions, which are:
- That you hold the bond to maturity;
- That the coupons are reinvested (rather than spent); and that
- Coupons are reinvested at an interest rate equal to the yield-to-maturity.
Let's look briefly at each assumption:
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