Calculate Yield to Maturity (YTM) in Excel

Understanding Yield to Maturity

Yield to Maturity (YTM) is a critical metric for fixed-income investors, representing the return earned on a bond held until maturity. It factors in the bond's current market price, face value, and coupon rate, allowing for the comparison of various fixed-income investments.

Using Excel's YIELD Function

To calculate YTM in Excel, use the YIELD function, which requires five arguments: the settlement date, maturity date, rate, price, and redemption value. This function provides a straightforward way to determine the annualized rate of return if the bond is held to maturity.

Step-by-Step Guide for Finding YTM

Begin by identifying the bond's coupon rate, current price, and face value. The coupon rate is a known quantity, while the price varies based on the required rate of return.

Next, establish the required rate of return, which discounts future interest payments and principal repayment to present value. This rate influences whether the bond trades at a premium or discount.

Input the bond information into the YIELD function in Excel to calculate the Yield to Maturity. Ensure the coupon rate and market price are up-to-date to reflect accurate YTM values.

Common Use Cases

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  Assessing the profitability of different bond investments
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  Comparing the yield to maturity of corporate bonds versus government bonds
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  Determining the impact of interest rate changes on bond portfolios
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  Calculating the expected return on a bond for retirement planning
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  Evaluating bond investment opportunities for an institutional investor’s fixed-income strategy

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