How do you calculate the yield to maturity without a financial calculator?
follow the formula for calculating yield to maturity.
See: http://www.moneychimp.com/articles/finworks/fmbondytm.htm
To calculate the yield to maturity (YTM) without a financial calculator, you can use the following approach:
Step 1: Gather the necessary information:
- Bond price: The current market price at which the bond is trading (P).
- Coupon payments: The annual interest payments made by the bond (C).
- Par value: The face value or the principal amount of the bond (F).
- Time to maturity: The number of years remaining until the bond matures (n).
Step 2: Set up the formula:
The basic formula to calculate YTM is:
P = (C/(1+r)) + (C/(1+r)^2) + (C/(1+r)^3) + ... + (C/(1+r)^n) + (F/(1+r)^n)
Where:
P = Bond price
C = Coupon payment
r = Yield to maturity (what we're trying to calculate)
F = Par value or face value
n = Time to maturity
Step 3: Apply trial and error method:
Since the YTM appears on both sides of the equation, it is not possible to solve the equation algebraically. One way to find the YTM is through a trial and error method.
You must make a reasonable guess for the value of YTM to begin with. Start by assuming an interest rate and substitute it into the equation's right-hand side. If the result is lower than the bond's price, increase your guess. Conversely, if the result is higher, decrease it. Repeat this process until you find a value of YTM that gets you closest to the bond price. This iterative process can be repeated using different guess values until you have sufficiently narrowed down the YTM.
Please note that this method is time-consuming and may require multiple iterations. It is helpful to have an understanding of the bond's pricing and interest rate environment to make an educated guess for the initial YTM value.