Yield to Maturity (YTM) of a bond is simply its compounded annual rate of return that you would earn if you bought and held the bond till it matures. It is a function of the current bond price, face value, coupon rate and the time remaining till maturity.
We can also say that the YTM is the Internal Rate of Return (IRR) of a bond.
There are a couple of assumptions inherent in the YTM. First, we assume that the coupon and principal payments will be made regularly by the bond issuer and second, the amount received as coupon payments will be continually re - invested at a rate equal to the YTM.
When the YTM < coupon rate, we have a discount bond (a bond selling for less than its face value)
When the YTM > coupon rate, we have a premium bond (a bond selling for more than its face value)
When the YTM = coupon rate, the bonds sells at par (equal to its face value)
Therefore, there is an inverse relationship between YTM and the price of a bond.
The easiest way to calculate YTM is through a financial calculator or a spreadsheet because the manual computation requires going through a few hit and trial steps.
The short video below demonstrates the manual procedure of finding a bond's YTM:
Thank you for the help. This solved my problem.
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