How Do I Compute the Yield to Maturity If I Buy a Bond That Was Issued in the Past?
- 1). Record the bond's current price as its present value. The current price is what you paid to buy the bond today. Enter the present value on your financial calculator as PV. Make sure to input the present value as a negative value so the calculator knows it's a cash outflow.
- 2). Calculate the bond's annual interest payments. This will be the bond's coupon interest rate multiplied by the standard bond face amount of $1,000. If your bond has a coupon rate of five percent, it will pay $50 in interest annually.
- 3). Enter your bond's interest payments as PMT on your financial calculator.
- 4). Enter your bond's return of principal payment at maturity as FV on your financial calculator. The standard return of principal amount for bonds is $1,000.
- 5). Record the number of years until the bond matures. Enter this number as N on your financial calculator.
- 6). Hit the interest button on your calculator and it will calculate your bond's yield to maturity as of the day you purchased it.
Example: You buy a bond for $800 that was issued three years ago. It has a coupon rate of six percent and matures in five years. What is its yield to maturity?
PV = -800
PMT = .06 x 1000 = 60
FV = 1000
N = 5
CPT r = 11.48 percent = the yield to maturity