Unisa Study Notes
There are various methods to calculate YTM.Yield to Maturity and Present Value of a BondThe yield to maturity is found in the present value of a bond formula:For calculating yield to maturity, the price of the bond, or present value of the bond, is already known. Calculating YTM is working backwards from the present value of a bond formula and trying to determine what r or i is. C= COUPON = 10% of R1?000 = R100F= FV or Par ValueA higher yield to maturity will have a lower present value or purchase price of a bond. For example, if the estimated yield to maturity shows a present value of $927.15 which is higher than the actual $920 purchase price. Therefore, the yield to maturity will be a little higher than 11.25%.Through trial and error, the yield to maturity would be 11.38%, which is found by adjusting each estimated rate until the present value equals the price of the bond.Excel is helpful for the trial and error method by setting the spread sheet so that all that is required to determine the present value is adjusting a fixed c ell that contains the rateExample of Yield to Maturity FormulaThe price of a bond is $920 with a face value of $1000 which is the face value of many bonds. Assume that the annual coupons are $100, which is a 10% coupon rate, and that there are 10 years remaining until maturity. This example using the approximate formula would beAfter solving this equation, the estimated yield to maturity is 11.25%.Another example of Yield to Maturity FormulaThe price of a bond is $950 with a face value of $1000 which is the face value of many bonds. Assume that the annual coupons are $100, which is a 10% coupon rate, and that there are 2 years remaining until maturity. This example using the approximate formula would be:Approx. YTM = R100 + (R1000-R950/2) divided by (1000+950)/2R100+R50/2 divided by 1950/2 = R125/975 = 12.8%After solving this equation, the estimated yield to maturity is 12.8%.Using a HP 10b II financial calculator, you would input as follows to solve for YTM:Sequence of steps Input Key to pressStep 1 ???????? 100 PMTStep 2 ???????? 950 – PV (negative)Step 3 ???????? 1000 FVStep 4 ???????? 2 nStep 5????????? Press I/YRResult?????????? 12.99(The answer in the study guide p 40 is not correct as it refers to the second part of the question) ................
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