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Bond Yield to Maturity (YTM) Approximation Formula:
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Yield to Maturity (YTM) is the total return anticipated on a bond if held until it matures. It represents the internal rate of return of a bond investment, considering all coupon payments and the difference between purchase price and face value.
The calculator uses the YTM approximation formula:
Where:
Explanation: This formula approximates the true YTM by averaging the bond's price and calculating the annual return as a percentage of this average value.
Details: YTM is crucial for bond investors to compare different bond investments, assess risk-return profiles, and make informed investment decisions. It provides a standardized measure of expected return.
Tips: Enter the annual coupon payment, face value, current market price, and number of periods until maturity. All values must be positive numbers. The result is expressed as a percentage.
Q1: What is the difference between YTM and current yield?
A: Current yield only considers the coupon payments relative to the current price, while YTM includes both coupon payments and capital gains/losses from price differences.
Q2: Why is this an approximation and not exact?
A: This formula uses averaging and doesn't account for the time value of money or compounding effects, making it a quick estimate rather than a precise calculation.
Q3: When should I use this approximation?
A: Use for quick comparisons and preliminary analysis. For exact calculations, use the full YTM formula that solves for the internal rate of return.
Q4: How does bond price affect YTM?
A: When bond price is below face value (discount bond), YTM is higher than coupon rate. When price is above face value (premium bond), YTM is lower than coupon rate.
Q5: What are typical YTM ranges for bonds?
A: YTM varies by bond type and risk. Government bonds typically range 1-5%, corporate bonds 3-8%, and high-yield bonds can exceed 10% depending on credit risk.