Zero coupon bonds yield to maturity

Example: Spot Interest Rates and Yield curve

That is, the issuer has the right to force the redemption of the bonds before they mature. This is similar to the way that a homeowner might choose to refinance call a mortgage when interest rates decline. Given a choice of callable or otherwise equivalent non-callable bonds, investors would choose the non-callable bonds because they offer more certainty and potentially higher returns if interest rates decline.

pricing of Zero Coupon Bonds:

Therefore, bond issuers usually offer a sweetener, in the form of a call premium, to make callable bonds more attractive to investors. A call premium is an extra amount in excess of the face value that must be paid in the event that the bond is called.

Bond Valuation YTM Yield to Maturity - CA Final SFM (New Syllabus) Classes & Video Lectures

Notice that the call schedule shows that the bond is callable once per year, and that the call premium declines as each call date passes without a call. It should be obvious that if the bond is called then the investor's rate of return will be different than the promised YTM.

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Bond Yield to Maturity Calculator

That is why we calculate the yield to call YTC for callable bonds. The yield to call is identical, in concept, to the yield to maturity, except that we assume that the bond will be called at the next call date, and we add the call premium to the face value. Let's return to our example:. What is the YTC for the bond?

In this case, the bond has 2 periods before the next call date, so enter 2 into N. The current price is the same as before, so enter The payment hasn't changed, so enter 40 into PMT. We need to add the call premium to the face value, so enter 1, into FV.

Zero Coupon Bond Yield Calculator

Remember that we must double this result, so the yield to call on this bond is Now, ask yourself which is more advantageous to the issuer: 1 Continuing to pay interest at a yield of 9. Obviously, it doesn't make sense to expect that the bond will be called as of now since it is cheaper for the company to pay the current interest rate. It is possible to get an approximate YTM for a bond using a bond yield table.

The best way to compute the YTM for a bond is to use a financial calculator.

Zero Coupon Bond Effective Yield

Using a financial calculator, punching in four out of five of the relevant variables price , par value, maturity, coupon payment, YTM will give you the fifth variable. Name required. Email will not be published required. This site uses Akismet to reduce spam. Learn how your comment data is processed.

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This makes calculating the yield to maturity of a zero coupon bond straight-forward:. Use the Yield to Maturity as you would use other measures of valuation: a factor in your decision whether to buy or avoid a bond.

Bond Yield Calculation on the BAII Plus Calculator

You can compare YTM between various debt issues to see which ones would perform best. Note the caveat that YTM though — these calculations assume no missed or delayed payments and reinvesting at the same rate upon coupon payments.

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Bond Yield to Maturity Calculator.