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The long-term bond was set to mature 15 years from the date it was issued. There's still five more years remaining until it matures. Sarah would like to know if she should sell the bond before then.
Well, lucky for Sarah, there is a way to see if the bond is worth hanging on to. Sarah can calculate what is known as yield to Yield to maturity problems and solutions YTM for the bond. Yield to Yield to maturity problems and solutions, also known as book yield or redemption yield, is the approximate interest rate that a fixed-interest investment will return based on its current price.
Fixed-interest investments are investments that have an interest rate that does not change over the life of the security.
Bonds are fixed-interest securities. The calculation for yield to maturity assumes that each year all interest earned on the bond will be kept or compounded so it is paid out once the bond matures. Calculating yield to maturity involves working backwards from the current price of the bond to see what its approximate yield is in the current market.
Investors can use the yield-to-maturity Yield to maturity problems and solutions to compare bonds with different maturity terms. Let's see how the process works, then we'll help Sarah with her problem.
This calculation can only approximate what the yield or actual interest rate will be because prices change in the actual bond market on a daily basis. Let's examine Sarah's bond. "Yield to maturity problems and solutions" looks like a lot of complex math, but it's not as difficult as it may seem. Let's break it down into parts we can solve it.
Get FREE access for 5 days, just create an account. Remember this is still only an approximation because the yield will change as the price of the bond changes. Because the price of the bond on the bond market is now more than the face value, the actual return or yield is less than the original interest rate. In this lesson, we learned that yield to maturity is an approximate measure of what a fixed-interest security, like a bond, is actually earning as compared to its published interest rate.
The data needed to make the calculation is the coupon or yearly interest payment, the face value of the investment, and its current price. If the bond's stated interest rate is less than its yield-to-maturity rate, the bond is selling at a discount. If the bond's stated interest rate is more than its yield-to-maturity rate, the bond is selling at a premium.
Investors can use this information to compare bonds with different maturity terms to find the best deal. After watching the lesson and working through practice equations, it should be possible for you to:. To unlock this lesson you must be a Study. Did you know… We have over college courses that prepare you to earn credit by exam that is accepted by over 1, colleges and universities.
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In this lesson, you will learn what yield to maturity is, discover the formula for calculating it, and see some examples of how the formula works and what it reveals about investments.
Yield to Maturity Equation One basic formula for calculating yield to maturity looks like this: The equation to find the yield looks like this: Subtract the current price from the face value then divide by the years to maturity: This gives you the actual coupon value: Yield to maturity problems and solutions divide by 2, getting an average: Want to learn more?
Select a subject to preview related courses: Sarah should probably keep the bond for now and keep an eye on the yield to maturity. Lesson Summary In this lesson, we learned that yield to maturity is an approximate measure of what a fixed-interest security, like a bond, is actually earning as compared to its published interest rate.
Yield to Maturity - Important Formula Basic formula for calculating yield to maturity: Understand the meaning of the term 'yield to maturity' Write the yield-to-maturity equation and calculate yield to maturity Show examples of the process of calculating yield.
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Browse Browse by subject. Upgrade to Premium to enroll in Financial Accounting: Enrolling in a course lets you earn progress by passing quizzes and exams. Solutions to bond yield practice problems. Suppose Yield to maturity problems and solutions bond has a price today of $, a coupon rate of 4%, and six years remaining to maturity.
If interest is paid. Relationships between zero rates, bond price and yield to maturity. So the coupon rate c is the only solution for equation g(y)=F. It implies that if bond price.
Q3: Problem Correction of problem: 2 year price is $, not $ zero-coupon bond with face value is: P = /()3 = 2. (a) The annual return in this case equals the yield to maturity.
The yield to maturity.
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