HOW TO CALCULATE YIELD TO MATURITY?

YIELD TO MATURITY :

YTM is that rate of discount (r) which makes the present value of cash inflows from the bond (in form of interest and redemption value) equal to the cash outflow on purchase of the bond.

The yield to maturity is calculated as given below:

                           

STEP 1:

Use the given formula and put YTM =rate of interest.

P_{0 =}[I_t * PVIFA _(YTM,n) ]+[MV *PVIF_(YTM,n)]

HERE,

 P₀ = current market price

 I_t = annual cash inflow

 MV= maturity value

 N= no. of years

STEP 2. 

Compare the lhs and rhs and take another value of “YTM” according to the cases given below until you get a range between which the CMP lies.

Cases:

1.       IF RHS  is smaller than LHS (RHS<LHS)	Take a lower value of YTM
2.       IF RHS is greater than LHS(RHS>LHS)	Take a higher value of YTM

STEP 3:

When  V_L  < CMP < V_H  apply the given formula.

YTM=     L    +    [   (V_L – CMP) / (V_L-V_H)  *(H - L)    ]

L= lower rate

H= higher rate

CMP=  current market price

V_L = value @lower rate

V_H = value @higher rate

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