Yield on the bond is not easy to find as there is no YTM formula available to calculate the yield to maturity. The difficulty in finding the yield on the bond is attributed to the fact that interest rate variable in the bond price variable is not separable from the bond value equation. This requires us to make use of iterative methods to solve the price equation to find the YTM. Here, me Abraham A. will take you on a guided tour to define, explain, and illustrate YTM calculation by using Newton-Raphson method to solve the bond price equation.
The YTM is an acronym for yield to maturity which is the interest rate that must be paid by the borrower to the lender. This interest rate is used as a discount rate to discount the periodic interest payment and the par value of the bond to find the price that the lender is willing to pay for the debt. As supply and demand for money goes up and down so does the interest rate only in the opposite direction. This leads to a whole schedule of interest rates over the term of the bond that is referred to as the term structure of the interest rate. In such cases an investor may still be able to find a single interest rate that is her yield from the investment. But finding the YTM that is constant over the term of the bond or one that changes over the term is not such an easy task. To find the yield to maturity one has to make use of some complex iterative calculations by using numerical methods. A large number of finance professors remove this complexity of finding the YTM by teaching the linear interpolation method of finding the yield to maturity. This is a trivial approach that itself is mired in complexity as it requires knowing two different interest rates one at which the current price of the bond is higher than its market price and on at which the present value of the bond is lower than the market price of the bond. But how would you be finding such two rates !. The numerical solutions come in varying levels of difficulty and complexity and some of these methods used in finding the YTM include the Secant method, the Modified Newton-Raphson method, Newton-Raphson method, and the Muller's method. Here I present you a YTM document that will explain the ins and outs of finding yield to maturity at first by defining it and then to present the YTM formula to calculate it using a number of iterative methods that find a precise YTM value.
|1||YTM Value Pack||$19|
The "Value Pack" not only gives you the YTM guide but it also gives away the tadXL v0.7 add-in for Excel 2007, 2010 and 2013. This particular add-in offers financial functions to find prices and yields on common stock, preferred stock and bonds with coupons and zero coupon bonds. One of these financial functions is the Excel YTM function that finds yield to maturity on a zero and on coupon bearing bond. It will ask you for input values for bonds market price, the par value, the remaining years to maturity, the coupon rate to return the results for YTM - yield to maturity. Thus if a bond with a par value of $1000 paid with a coupon rate of 4% is priced at $950 with 10 years to maturity thus you would use this Excel YTM formula to find the yield to maturity as =mbaYTM(10, 4%, 950, 1000,,1/2) to find the YTM on this coupon bearing bond that pays interest twice a year.
|1||YTM Value Bundle||$29|
The "Value Bundle" bundles together not only the YTM document and the tadXL v0.7 add-in but it further gives away the tadCalcs YTM calculator for Windows 7 and 8. This YTM calculator finds the yield to maturity for a zero coupon and a coupon bearing bond when you enter values for par value, market price, coupon rate and the remaining years to maturity on the bond. The YTM calculator offers a clean and easy to navigate interface where the input areas are clearly visible and the YTM is found by simply clicking on the "calculate" button. Thus the "Value Bundle" offers you more value for your money by giving away the YTM document, the tadXL v0.7 add-in and the tadCals YTM calculator in one bundle.
Finance tutorials on a variety of topics ranging from finding ROI using IRR, NPV, Payback period, etc. TVM calculations i.e. present value & future value of loans and bank deposits. Valuation & yield on stocks and bonds i.e. cost of equity, & debt. Rates of return on investments i.e. ARR, GRR, holding period return & yield.
Excel 4 finance to perform DCF analysis NPV, xNPV, IRR, xIRR, MIRR, xMIRR etc. Time value of money calculations i.e GRADIENT, INTEREST RATE, NPER, PMT, etc, yields and prices of bonds and stocks. Rates of return i.e. HPR, HPY, AHPR, and AHPY, etc.
TI BA II plus guide to analyze investments using capital budgeting methods i.e IRR, NPV, MIRR etc. TVM calculations i.e. RATE, NPER, PMT, PV, FV. Interest rate factors i.e. PVIFA, PVIF, FVIFA, FVIF, etc .
Finance tables to find interest factors for present value and future value of $1 and of annuities with start of period and end of period payments in amount of $1. Interest rates for growing and shrinking annuities are available as well.