Yield to maturity is the fully compounded annual rate of return paid out over a bond's life. Find out how to compute the rate of return on your bond.
- Step 1: Take the first sum of $75 and divide it by the second sum of $875 to compute an approximate yield to maturity, or YTM, of 8.57 percent.
- FACT: President Franklin D. Roosevelt signed legislation in 1935 creating savings bonds, popularly called "baby bonds."
- Step 2: Take face value price of the bond, add it to the purchase price, and divide this sum by two. So the $1,000 face value of your bond that you paid $750 for totals $1,750. Divided by two, the sum is $875.
- Step 3: Add the coupon payment of $50 to the sum of $25. Your total is now $75.
- TIP: Most bonds pay semi-annually, so add these together to get the coupon payment.
- Step 4: Subtract the purchase price from the face value of the bond and divide that sum by the number of years to maturity. For example, if you paid $750 for your $1,000 bond and the period of maturity is 10 years, the total would be $25.
- Step 5: Determine the annual interest paid on the bond to find the coupon payment. If you hold a bond worth $1,000 at 5 percent interest, you will receive $50 in coupon payments per year.