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Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity. Zero-coupon bonds come with no recurring coupon payment, which makes their yield to maturity equal to the normal rate of return on a bond.

The formula for calculating the yield to maturity on a zero-coupon bond is:

Yield to Maturity = (Face Value / Current Price of Bond) ^ (1 / Years to Maturity) - 1

Consider a \$1,000 zero-coupon bond with two years until maturity. The bond is currently valued at \$925. To get its yield to maturity, divide its \$1,000 face value by its current value of \$925, to the 1 over years until maturity. Then subtract by 1. The equation produces a value of .03975, which is rounded and listed as a yield of 3.98%.

If economic uncertainty makes an investor more willing to hold a bond, the bondâ€™s price will probably rise, which will increase the denominator in the formula. As a result, the yield will decrease.

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