Debt Securities - Calculating Yields

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. Professionals

    Series 99

    FINRA/NASAA Series 99 Exam Guide
  2. Professionals

    Series 24

    FINRA/NASAA Series 24 Exam Guide
  3. Professionals

    Becoming A Registered Investment Advisor

    To become a registered investment advisor requires specific licensing, qualifications and regulations, but the greater freedom may be worth it.
  4. FA

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  5. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  6. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  7. Your Practice

    How Likely is a New Fiduciary Rule in 2016?

    New fiduciary standards for advisors working with retirement accounts are on the horizon. Will they become reality in 2016?
  8. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  9. Brokers

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
  10. Professionals

    Private Banker: Career Path & Qualifications

    Discover what kind of work private bankers do, and learn more about how you can develop the experience and qualifications required to work in the field.
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

    A securities license entitling the holder to register as a limited ...
  3. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  4. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  5. Series 79

    A examination to ensure a candidate is qualified to become a ...
  6. Research Analyst

    A person who prepares investigative reports on equity securities. ...
RELATED FAQS
  1. How does FINRA differ from the SEC?

    With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. ... Read Full Answer >>
  2. How can I find out if my employer is a member of FINRA?

    To find out if your employer is a member of the Financial Industry Regulatory Authority or FINRA (previously the National ... Read Full Answer >>
  3. I have a CFA designation. Do I qualify for any exemptions from FINRA licensing exams?

    Unfortunately, a CFA charter does not qualify you for any FINRA exam exemptions. Read Full Answer >>
  4. Am I qualified once I complete my FINRA certification exam?

    Even if you have completed your Financial Industry Regulatory Authority or FINRA (previously the National Association of ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center