I'm looking at an individual corporate bond (20341WAD7) with a 8.25 coupon trading at a last price of around 88 cents on the dollar (88/100). By my simple math the yield should be 8.25%/.88 = 9.375%. And yet the yield is listed by my broker as 12.08%. (Yield to Worst and Yield to Maturity are both listed as about 11.82) How can this be?
9.375% would be the current yield, meaning the yield you'd get from the next coupon payment. The yield to maturity is the annualized return you'll receive if you hold the bond until maturity and reinvest the coupons at the same rate. It's essentially the IRR of the bond if you hold it to maturity. IRR generally can't be computed directly - it is typically calculated with an iterative process, changing the rate of return until the present value of the bond's cash flows equals the market price. However, one formula to estimate it is
YTM = Int + (Par - MV)/TTM -------------------- (Par + MV)/2 = 8.25 + (100-88)/4 ----------------- (100+88)/2 = 11.97%