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.
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:
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?
- 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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