The Ins and Outs of Bond Yield

Step 3: How Is Yield to Maturity Calculated?

The Ins And Outs Of Bond Yield Splash image

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.

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:

Classroom Steps

  • 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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