1

Taking an introductory investment course, was following up on bond yields.

I thought the yield is calculated as follows (sorry for some reason LaTex formatting doesn't work - so inserting an image):

enter image description here

I am so very confused with all the terms. I was trying to unpack this simple example

...For example, if a 10-year T-note with a face value of $1,000 is auctioned off at a yield of 3%, a subsequent drop in its market value to $974.80 will cause the yield to rise to 3.3%, since the Treasury will still be making the $30 ($1,000 x .03) annual coupon payments as well as the $1,000 principal repayment...

Now if I got the formula correct, subsequent drop in market price would cause yield to increase to 3.07% not 3.3%.

Improve this question

1 Answer 1

Reset to default
4

The 3.30% yield mentioned in the example is the yield to maturity (YTM), not the current yield. Unlike the current yield, the yield to maturity takes into account the $25.20 income (1000 - 974.80) from buying the bond below face value.

You could use a spreadsheet's RATE function to calculate the YTM like this:

Spreadsheet calculation of yield to maturity (YTM)

Improve this answer
3
  • Thanks! In this example (investopedia.com/articles/bonds/07/…), they specifically mention current yield, do you know if they really mean ytm? Because once again for 2 year bond I can't get 3.08% I get (30/99.84) = 3.004% If you think this should be its own question I can create one thx again.
    – hba
    Aug 20, 2022 at 16:23
  • 1
    @hba There might be a mistake in that article. The 3.08% for the 2 year bond is its YTM, not its current yield. i.stack.imgur.com/zda2W.png
    – Flux
    Aug 21, 2022 at 2:38
  • the terms are so confusing - thanks for your help!
    – hba
    Aug 21, 2022 at 14:05

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .