When an investor purchases a bond in the secondary market at a discount, the discount must be accreted over the remaining life of the bond. The accretion of the discount will result in a higher yield to maturity. When an investor purchases a bond in the secondary market at a premium, the premium must be amortized over the remaining life of the bond. The amortization of the premium will result in a lower yield to maturity.

In order to calculate the bonds approximate yield to maturity, use the following formulas:

For a bond purchased at a discount use:

(Annual Interest + Annualized Discount) / (Price Paid + PAR) / 2

The Annualized discount is found by taking the total discount and dividing it by the number of years remaining until maturity. For example, let’s assume an investor purchased a 10% bond at $900 with 10 years until maturity. The bonds approximate yield to maturity would be found as follows:

$100 + $10 / $900 + $1,000 / 2

In this case the bond’s approximate yield to maturity is 11.57%.

For a bond purchased at a premium use:

(Annual Interest - Annualized Premium) / (Price Paid + PAR) / 2

The Annualized premium is found by taking the total premium and dividing it by the number of years remaining until maturity. For example lets assume an investor purchased a 10% bond at $1,100 with 10 years until maturity.

The bonds approximate yield to maturity would be found as follows:

$100 - $10 / $1,100 + $1,000 / 2

In this case the bond’s approximate yield to maturity is 8.57%

Calculating the Yield to Call

In the event that the bond may be called in or redeemed by the issuer under a call feature an investor may calculate the approximate yield to call by using the approximate number of years left until the bond may be called.

Take note: The yield to call will always extend past the yield to maturity. The yield to call will always be the highest yield on a bond purchased at a discount and it will always be the lowest yield for a bond purchased at a premium.

 



Maturities

Related Articles
  1. Managing Wealth

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  2. Managing Wealth

    Understanding Bond Prices and Yields

    Understanding this relationship can help an investor in any market.
  3. Markets

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
  4. Markets

    Calculating Bond Equivalent Yield

    The bond equivalent yield calculates the semi-annual, quarterly or monthly yield on a discount bond or note.
  5. Markets

    Bond Basics: Yield, Price And Other Confusion

    Investopedia Explains: Bond yield, Bond price, yield to maturity, the link between price and yield and bond price in the market.
  6. Markets

    Comparing Yield To Maturity And The Coupon Rate

    Investors base investing decisions and strategies on yield to maturity more so than coupon rates.
  7. Managing Wealth

    5 Basic Things To Know About Bonds

    Learn these basic terms to breakdown this seemingly complex investment area.
  8. Markets

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  9. Markets

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  10. Markets

    Bond Yields: Current Yield And YTM

    A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ...
Trading Center