Calculating the Years To Maturity (YTM) on a financial calculator can be a valuable tool to calculate the amount of interest that accrues throughout the life of an investment
. However, it can seem complicated and lead to errors in your calculation.
Find out all about how to accurately measure the YTM in this blog article!
What is YTM?
Assuming you already know the basics of how to use a financial calculator, we will now focus on how to calculate YTM. YTM, or years to maturity, is the length of time until a bond reaches its maturity date. The formula for calculating YTM is:
(N/A)/((PV+FV)/2)^(1/n) – 1
where:
N = number of payments per year
A = interest payment per year
PV = present value of the bond
FV = face value of the bond
n = number of years until maturity
For example, let’s say you have a 10-year $1,000 bond with an 8% coupon rate. The interest payments would be $80 per year (8% of $1,000), and the face value of the bond is $1,000.
Therefore, the present value would be less than $1,000 since you are effectively receiving less than the face value at maturity.
Let’s say the present value is $950. We would then plug these values into our formula as follows:
(10/80)/((950+1000)/2)^(1/10) – 1
How to calculate YTM (Years To Maturity) on a financial calculator
Figuring out the YTM, or years to maturity, on a financial calculator can be tricky. However, once you know how to do it, it’s not that difficult. Here’s a step-by-step guide on how to calculate YTM on a financial calculator:
- Enter the bond’s purchase price. This is the price you paid for the bond.
- Enter the bond’s face value. This is the amount of money the bond will be worth when it matures.
- Enter the bond’s coupon rate. This is the interest rate that the bond pays.
- Enter the number of years until the bond matures.
- Press the ‘Calculate’ button.
The calculator will now give you the YTM, or years to maturity, for the bond. Keep in mind that this is only an estimate, as actual YTM can vary depending on market conditions.
Example: How Johnnie wanted to calculate the YTM in his 401(k) but wasn’t sure how
When Johnnie went to his (k) plan administrator to ask about the YTM on his bond, she told him that it’s easy to calculate using a financial calculator.
All he would need is the bond’s current market price, the face value of the bond, the coupon rate, and the number of years until maturity.
With that information, he could plug it into the following equation:
YTM = [(Face Value – Market Price) / Market Price] * [1 / Years to Maturity] – 1 + [Coupon Rate / 2]
For example, let’s say that Johnnie’s bond has a face value of $1,000, a market price of $950, a coupon rate of 5%, and 20 years until maturity.
Plugging those numbers into the equation above would give us a YTM of 4.76%.
That’s great, but how is that helpful without a financial calculator?
Or perhaps an Excel spreadsheet or calculator on his phone?
Can Johnnie still figure out this bond heat make money day trading relationship?
There’s another way. Johnwed could use the present value formula to get its current yield.
The equation for the present value formula is PV = FV / (1+ i)^n / (1- i)^nFor example, the 10 year zero coupon Treasury note of 2019 has a face value of $1,000 (the coupon rate is an additional 5% of the face value) making its PV $1000 / (1 + 0.05)^10 / ( 1- 0.05 )^10 = $918.84When the 10 year zero coupon Treasury note of 2019 mature in 2029 with a price of 980, this makes the present value of this bond to be worth 980 / (1+0.05)^10 / 1- x( 1-0.05)^930.
Thus, this bond is selling for a 2.15% current yield (980/918.84). Even I buy 3x of these and return $3, 1500 at maturity when the interest rate have dropped to 2%, the net return will be -151.6% (10-year zero coupon Treasury note of 2019 price is still $918.84).
Conclusion
YTM is a measure of the expected return on a bond. It is calculated by first finding the current yield, then adding in the coupon rate. The current yield is found by dividing the annual interest payment by the current price of the bond. The coupon rate is found by dividing the annual interest payment by the face value of the bond.
