A:

To make appropriate decisions in bond investing, it is important to understand the concept of the yield calculations that bonds receive. As an important aspect of investing basics, bond yields are the rate of return you receive after purchasing a bond and are the accounting measurements that allow you to compare one bond with another. Two yield calculations are generally evaluated when it comes to selecting callable bonds for a portfolio: yield to maturity and yield to call.

## Yield to Maturity

A bond’s yield to maturity calculation provides you with the total return you would receive if the bond was held through its maturity date. Yield to maturity assumes that all interest payments are received from the date of purchase until the bond reaches maturity, and that each payment is reinvested at the same rate as the original bond. However, you can utilize the spot rate to determine market value of a purchase, as this metric takes into account fluctuating interest rates. Yield to maturity is based on the coupon rate, face value, purchase price and year until maturity, calculated as:

Yield to maturity = {Coupon rate + (Face value – Purchase price/years until maturity)} / {Face value + Purchase price/2}

## Yield to Call

For most bond investors, it is important to also estimate the yield to call, or the total return that would be received if the bond purchased was held until its call date instead of full maturity. Because it is impossible to know when an issuer may call a bond, you can only estimate this calculation based on the bond’s coupon rate, the time until the first (or second) call date, and the market price.

RELATED FAQS
1. ### What is the difference between yield to maturity and the coupon rate?

A bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value. Read Answer >>
2. ### When is a bond's coupon rate and yield to maturity the same?

Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the components of bonds and how they ... Read Answer >>
3. ### Can a bond have a negative yield?

It is unlikely that a bond will have a negative yield but there are a few rare exceptions. Learn of the cases in which a ... Read Answer >>
4. ### Why do interest rates have an inverse relationship with bond prices?

At first glance, the inverse relationship between interest rates and bond prices seems somewhat illogical, but upon closer ... Read Answer >>
5. ### What is the most common solvency ratios used in fundamental analysis?

Learn about the difference between a bond's coupon rate and its yield rate, how the coupon rate influences market price and ... Read Answer >>
Related Articles
1. Investing

### 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.
2. Investing

### 4 basic things to know about bonds

Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
3. Investing

### Understanding Bond Prices and Yields

Understanding this relationship can help an investor in any market.
4. Investing

### Find the Right Bond at the Right Time

Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
5. Investing

### Why Bond Prices Fall When Interest Rates Rise

Never invest in something you don’t understand. Bonds are no exception.
6. Investing

### Here's What Happens When a Bond Is Called

Learn why early redemption occurs and how to avoid potential losses.
RELATED TERMS
1. ### Gross Yield

The gross yield is the yield on an investment before the deduction ...
2. ### Required Yield

Required yield is the return a bond must offer in order for the ...
3. ### Current Maturity

The current maturity is the interval between the present date ...
4. ### Yield To Maturity (YTM)

Yield to maturity (YTM) is the total return expected on a bond ...
5. ### Straight Bond

A straight bond is a bond that pays interest at regular intervals, ...

A bond ladder is a portfolio of fixed-income securities in which ...
Hot Definitions
1. ### Yield Curve

A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
2. ### Portfolio

A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
3. ### Gross Profit

Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
4. ### Diversification

Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
5. ### Intrinsic Value

Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
6. ### Current Assets

Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...