Use this calculator to determine the current yield and yield to maturity (YTM) of a bond. Enter the required information below.
Calculating bond yields is crucial for investors to assess the return on their bond investments. There are two primary measures of bond yield: Current Yield and Yield to Maturity (YTM). This guide will walk you through the process of calculating both.
The current yield is a simple measure that calculates the annual return on a bond based on its current market price:
$$\text{Current Yield} = \frac{\text{Annual Coupon Payment}}{\text{Market Price}} \times 100\%$$
The YTM is a more comprehensive measure that takes into account the time value of money. It is the internal rate of return of a bond, considering all future cash flows:
$$\text{Market Price} = \sum_{t=1}^{n} \frac{C}{(1+\text{YTM})^t} + \frac{F}{(1+\text{YTM})^n}$$
Where:
Let's calculate the yields for a bond with the following characteristics:
Calculate the annual coupon payment:
$$\text{Annual Coupon Payment} = $1,000 \times 5\% = $50$$
Calculate the current yield:
$$\text{Current Yield} = \frac{$50}{$950} \times 100\% = 5.26\%$$
The YTM is calculated using an iterative process. Using a financial calculator or spreadsheet function, we find:
$$\text{YTM} \approx 5.85\%$$
This bar chart illustrates the difference between the Current Yield (5.26%) and the Yield to Maturity (5.85%) for our example bond. The YTM is higher because it accounts for the capital gain the investor will realize when the bond matures at its face value, which is higher than the current market price.