1. What is Yield to Maturity?

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

2. How Does the Calculator Work?

The calculator uses the YTM approximation formula:

Where:

• \( C \) — Annual coupon payment ($)
• \( F \) — Face value of the bond ($)
• \( P \) — Current price of the bond ($)
• \( n \) — Years to maturity

Explanation: The formula approximates the annual return by considering both the coupon payments and the capital gain/loss if held to maturity.

3. Importance of YTM Calculation

Details: YTM is a crucial metric for bond investors as it allows comparison between bonds with different prices, coupons, and maturities. It represents the internal rate of return of a bond investment.

4. Using the Calculator

Tips: Enter all values in dollars (except years). The calculator requires positive values for all inputs, with years to maturity > 0.

5. Frequently Asked Questions (FAQ)

Q1: Is this the exact YTM calculation?
A: No, this is an approximation. The exact YTM calculation requires solving a complex equation iteratively.

Q2: How does YTM differ from current yield?
A: Current yield only considers coupon payments relative to price, while YTM also accounts for capital gains/losses at maturity.

Q3: What if the bond pays semi-annual coupons?
A: For semi-annual bonds, divide the annual coupon by 2 and multiply the result by 2 to annualize the YTM.

Q4: Why does YTM change when bond prices change?
A: YTM and bond prices have an inverse relationship - when prices rise, YTM falls, and vice versa.

Q5: What are typical YTM ranges?
A: YTM varies by bond type and market conditions, but investment-grade bonds typically range from 2-6%, while high-yield bonds may offer 5-15%.