Calculate Yield to Maturity of a Coupon Bond in 2 Minutes

Ryan O'Connell, CFA, FRM shows how to calculate yield to maturity (YTM) of a coupon bond. He uses a TI BA II Plus Calculator to calculate yield to maturity (YTM)
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Disclosure: This is not financial advice and should not be taken as such. The information contained in this video is an opinion. Some of the information could be wrong. This channel is owned and operated by Portfolio Constructs LLC. Some of the links above are affiliate links, meaning, at no additional cost to you, I will earn a commission if you click through and make a purchase.
Example spot rates in this video come from:
CFA Level 2, Fixed Income
The Term Structure and Interest Rate Dynamics
by Thomas S.Y. Ho, PhD, Sang Bin Lee, PhD, and Stephen E.
Wilcox, PhD, CFA

[@RyanOConnellCFA]

🎓 Tutor With Me: 1-On-1 Video Call Sessions Available ► Join me for personalized finance tutoring tailored to your goals: ryanoconnellfinance.com/finance-tutoring/ 📚 CFA Exam Prep Discount - AnalystPrep: ► Get 20% off CFA Level 1, 2, and 3 complete courses with promo code "RYAN20". Explore here: analystprep.com/shop/all-3-levels-of-the-cfa-exam-complete-course-by-analystprep/?ref=mgmymmr

[@undeux6360]

great vidéo but you could have write down what you wrote on the calculator on the top right

[@alexh2939]

short, precise and easy to understand, great video

[@RyanOConnellCFA]

Thank you Alex!

[@orbityellow]

Fantastic. Your to-the-point explanations are well received. Cheers.

[@deniscaparroz1577]

Great video! But shouldn't this calculation result in 904.45 for PV?

[@RyanOConnellCFA]

Thank you! What makes you think this should be 904.45? Could you write out the math in a formula?

[@deniscaparroz1577]

@@RyanOConnellCFA actually, I did the exact math you put in the video.. so 70/(1.09^1) + 70/(1.10^2) + 1070/(1.11^3). But I get 904.45 by doing that, instead of 905.65

[@RyanOConnellCFA]

​@@deniscaparroz1577 Good catch! I get them same value as you. The rest of the logic & approach in the video is still sound despite the small error in the PV calculation

[@henryrayner4346]

Great video, really quick and helpful - thanks!

[@RyanOConnellCFA]

My pleasure Henry!

[@revatilamba]

How to calculate the present value with a financial calculator?

[@RyanOConnellCFA]

That video will be posted next Monday morning!

[@justine7283]

very helpful video! is it possible for you to explain where the spot rate is coming from?

[@RyanOConnellCFA]

The spot rate comes from the supply and demand forces in the market! It represents the amount people are wiling to borrow or lend at given the risk of the cash flow

[@douglasdallichjr.7836]

Ryan, say you purchase this bond at $1000 - if your PV ends up being less than $1000, are you essentially losing $ on this investment (in real terms, not nominal)? Is your NPV < 0? Thanks for this great & quick video!

[@RyanOConnellCFA]

Hey, its my pleasure! I believe that it depends on when you measure PV if it is a coupon bond. For example, lets say the bond pays 10% coupons and it is priced to Par of $1000 when I initially purchase the bond. Then the day after I purchase it, interest rates in the market drop to 2%. This bond has a 10 year life. And for 9 straight years, I receive 10% coupons when the market rate is only 2%. Those coupons have a high NPV. Then, imagine the day before the final payment of the loan is due at its maturity, the interest rate rises to 11%. The remaining part of the bond would then have a PV of less than $1,000. But the 9 straight years of high value coupons would outweigh the final payment. So, I believe that we can prove with an extreme example that the scenario you proposed in your question may not always be true

[@dava12333]

Good video!. Easy to understand.

[@valeriocapano6222]

Good Morning, but in essence, what is the YTM ?

[@RyanOConnellCFA]

In essence, it is the annualized return you will earn on the bond if you hold it for the entire holding period. It accounts for all payments over the bond's lifetime, including coupon payments and the difference between the bond's purchase price and its face value at maturity.

[@undeux6360]

And BTW when i calcultate PV i found 904.45 and not 905.65

[@RyanOConnellCFA]

You are right! The PV in the video is incorrect but the logic and the process is still sound

[@user-fc8jw2kq3o]

You should start you own FRM L1 preparation videos

[@dafnemata4107]

Thank you for the video! How can I find the CPT on a HP10bll+ fin calculator?

[@RyanOConnellCFA]

My pleasure! I do not have HP10 bii+ calculator so I unfortunately cannot give you a great answer. Please come back to this comment and reply with the solution you found for the next person with the same problem if possible!

[@ashleyanderson4635]

where can I buy a physical calculator that has FV PV I/Y ect on it???

[@RyanOConnellCFA]

The TI BA II Plus on Amazon is a good option!

[@WheresMyPolenta]

Hello. What does the "1" in the (1+.09) represent? Thanks

[@RyanOConnellCFA]

In order to discount the cashflow back to present value you always need to divide the cashflow by (1+interest rate)^time. The one is just a mathematical way to get the discount factor. Does that help?

[@mohammad.h7568]

Hello,What is your opinion about the master of financial economics? (Careers in industry)

[@RyanOConnellCFA]

I personally find it to be extremely interesting and think it would be a great career path. Are you considering it?

[@mohammad.h7568]

I doubt the choice between finance or financial economics for a master's degree

[@RyanOConnellCFA]

@@mohammad.h7568 Are you leaning towards one or the other?

[@mohammad.h7568]

@@RyanOConnellCFAI think financial economics is better because understanding and predicting fiscal and monetary policies is much more important than predicting a company's balance sheet, etc. In addition, in financial economics, We become more familiar with the concepts of present value and expected value and the risk of uncertainty in the future. What do you think?

[@RyanOConnellCFA]

@@mohammad.h7568 In my opinion, predicting a companies balance sheet only applies to a very small number of jobs in finance like equity research analysts, and analysts at investment funds. There is a lot of other work going on in traditional finance. But I agree financial economics would be a really interesting field

[@wonkabar6]

Why wouldn’t you compound each year on the previous year spot rate. Second year isn’t 1.09 * 1.1? Why did you use 10% spot rate twice?

[@RyanOConnellCFA]

I believe you may be getting spot rates confused with forward rates. You do not compound spot rates from previous years to come up with spot rates in future years. The spot rate of 10% was only used once in the 2nd year. Years one and three had different spot rates

[@wonkabar6]

@@RyanOConnellCFA Thanks for the explanation!

[@RyanOConnellCFA]

@@wonkabar6 My pleasure!

[@dmarketoutlook4967]

does this apply to us treasuries?

[@RyanOConnellCFA]

Yes!

[@musaa.olarray6456]

Great video, but the step-by-step calculation is important, finding it difficult to get 905.65

[@RyanOConnellCFA]

Thank you! Any idea where you are getting off track?

[@matteoriccobono5026]

can you tell me how to do it without a calculator? thanks

[@RyanOConnellCFA]

Matteo, I don't think it would be possible for anyone who isn't an expert mathematician to calculate this without a calculator

[@eddieteabagify]

worthless info unless you buy on issuance. what is the formula if you buy on the secondary market 38 days after issuance? how many days are used? 360? 365?

[@RyanOConnellCFA]

You thought all that would be covered in a video that includes "2 minutes" in the title? This video should help you on pricing bonds in between coupon dates: kzbin.info/www/bejne/bJiQqJeKnJ1jlcU