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The par value of the bond is the amount that the bond issuer will pay to the bond holder when the bond matures. Unanswered Questions. Does a zero-coupon bond have compounding frequencies such as quarterly or monthly; if there is a specific compounding frequency, how is the YTM computed? Answer this question Flag as Flag as Include your email address to get a message when this question is answered.

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Warnings Make sure that the required rate of return and the number of time periods remaining until maturity are measured in the same units of time. In the above example, the stated interest rate was an annual one, and the number of time periods until maturity was measured in years. Things You'll Need Calculator. Edit Related wikiHows. References Investopedia: Advanced Bond Concepts. Financial Bonds Print Edit Send fan mail to authors. Did this article help you? Yes No. Cookies make wikiHow better.

Finding Bond Price and YTM on a Financial Calculator

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In the case of our example bond, the current yield understates the total expected return for the bond. As we saw in the bond valuation tutorial , bonds selling at a discount to their face value must increase in price as the maturity date approaches. The YTM takes into account both the interest income and this capital gain over the life of the bond.

There is no formula that can be used to calculate the exact yield to maturity for a bond except for trivial cases. Instead, the calculation must be done on a trial-and-error basis. This can be tedious to do by hand.

The Current Yield

Fortunately, the BAII Plus has the time value of money keys, which can do the calculation quite easily. Technically, you could also use the IRR function, but there is no need to do that when the TVM keys are easier and will give the same answer. Enter 6 into N , But wait a minute! That just doesn't make any sense. You need to remember that the bond pays interest semiannually, and we entered N as the number of semiannual periods 6 and PMT as the semiannual payment amount Since the YTM is always stated as an annual rate, we need to double this answer.

In this case, then, the YTM is 9. Many bonds but certainly not all , whether Treasury bonds, corporate bonds, or municipal bonds are callable.


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That is, the issuer has the right to force the redemption of the bonds before they mature. This is similar to the way that a homeowner might choose to refinance call a mortgage when interest rates decline. Given a choice of callable or otherwise equivalent non-callable bonds, investors would choose the non-callable bonds because they offer more certainty and potentially higher returns if interest rates decline.

How to Calculate a Zero Coupon Bond: 4 Steps (with Pictures)

Therefore, bond issuers usually offer a sweetener, in the form of a call premium, to make callable bonds more attractive to investors. A call premium is an extra amount in excess of the face value that must be paid in the event that the bond is called. Notice that the call schedule shows that the bond is callable once per year, and that the call premium declines as each call date passes without a call. It should be obvious that if the bond is called then the investor's rate of return will be different than the promised YTM.

That is why we calculate the yield to call YTC for callable bonds. The yield to call is identical, in concept, to the yield to maturity, except that we assume that the bond will be called at the next call date, and we add the call premium to the face value.

Zero Coupon Bond Yield Calculator

Let's return to our example:. What is the YTC for the bond? In this case, the bond has 2 periods before the next call date, so enter 2 into N.