What will be the price of the zero coupon bonds? You hold the bond for four years, and sell it immediately after receiving the fourth coupon.
The yield to maturity of a 1000 bond with a 7 coupon
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In this case, YTM is known as the gross redemption yield. YTM calculations also do not account for purchasing or selling costs.
YTM also makes assumptions about the future that cannot be known in advance. An investor may not be able to reinvest all coupons, the bond may not be held to maturity and the bond issuer may default on the bond. A bond's yield to maturity YTM is the internal rate of return required for the present value of all the future cash flows of the bond face value and coupon payments to equal the current bond price. Some of the more known bond investments include municipal, treasury, corporate and foreign.
While municipal, treasury and foreign bonds are typically acquired through local, state, or federal governments, corporate bonds are purchased through brokerages. If you have an interest in corporate bonds then you will need a brokerage account. Fixed Income Essentials.
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Yield to Maturity, YTM
Login Advisor Login Newsletters. Bonds Fixed Income Essentials. Yield to maturity is also referred to as "book yield" or "redemption yield. Or this formula:.
The yield to maturity of a bond with a 7 coupon rate semi annual coupons
Compare Investment Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Bond Yield Definition Bond yield is the amount of return an investor will realize on a bond, calculated by dividing its face value by the amount of interest it pays.
Current Yield Current yield is the annual income interest or dividends divided by the current price of the security. Factors that Create Discount Bonds A discount bond is one that issues for less than its par—or face—value, or a bond that trades for less than its face value in the secondary market. Just as with buying any other discounted products there is risk involved for the investor, but there are also some rewards.
Effective Yield The effective yield is the yield of a bond which has its coupons reinvested after payment has been received by the bondholder. Yet as interest rates in the broader bond market change, bond prices can rise or fall dramatically from their par value, and that makes calculating yields trickier. To get an initial approximation of a semi-annual bond yield, one simple method is simply to take the coupon rate on the bond to calculate the semi-annual bond payment and then divide it by the current price of the bond to get a yield.
Coupon rates are quoted in terms of annual interest payments, so you'll need to divide the rate by two in order to figure out the semi-annual payment. The problem with using the simple method to calculate semi-annual bond yields is that it ignores the impact of gains or losses between now and when the bond matures.
One way to take gain or loss into account is to divide it up across the remaining periods and then add or subtract it from the interest payment. Strictly speaking, dividing the gain into equal payments doesn't match up with the way that compound returns work, so if you run the situation through a financial calculator, you'll get a slightly different answer. In the case above, the actual semi-annual bond yield is 2.
Nevertheless, you can see that the quick equal-payment method gets you fairly close to the real answer. Finally, keep one thing in mind: in most cases, bond yields are expressed in terms of annual yield, even though payments are made semi-annually. Regardless of how they're stated, though, knowing the bond yield can help you compare different bonds to find the best choices for your financial needs.
For many investment options, both stocks and bond funds, you'll need a brokerage account. The Fool has a helpful section that will let you compare various brokers' offerings , and find one that's right for you.