Yield to Maturity (YTM) is a critical concept in fixed income valuation, as it represents the total return an investor would receive if they held a bond until its maturity date. It considers the bond's current market price, face value, coupon rate, and the time remaining until maturity. YTM is an essential factor for investors to consider when comparing different fixed-income securities, as it provides a standardized measure of return that accounts for both interest payments and potential capital gains or losses.
Which of the following factors is NOT considered when calculating a bond's yield to maturity?
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Correct!
Select an option above to see an explanation here.
A) The current market price determines potential capital gains or losses. B) The face value is the principal amount returned at maturity. C) The coupon rate determines the annual interest payments. D) Credit rating is not a direct factor in calculating yield to maturity, although it may influence the bond's market price and coupon rate.
What is the primary difference between yield to maturity and current yield?
A) Yield to maturity provides a more comprehensive measure of return, including interest payments and potential capital gains or losses. B) Both yield to maturity and current yield can be applied to bonds with fixed coupon rates. C) Both yield to maturity and current yield can be applied to bonds with fixed maturity dates. D) Both yield-to-maturity and current yield calculations use the bond's market price.
An investor purchases a bond with a face value of $1,000, a coupon rate of 4%, and a current market price of $1,100. If the bond has a yield to maturity of 3%, what is the bond's maturity date?
A) A 5-year bond would have a yield to maturity of approximately 2.2%. B) A 10-year bond would have a yield to maturity of approximately 3%. NOTE: This question is likely trickier than would be tested on the Series 65, but it is a worthwhile exercise for manually calculating YTM (via spreadsheet, for instance). C) A 15-year bond would have a yield to maturity of approximately 3.4%. D) A 20-year bond would have a yield to maturity of approximately 3.6%.
In the early 1980s, U.S. Treasury bond yields reached record highs, with 30-year bonds yielding over 15%. Investors who purchased these bonds and held them to maturity would have received a total return of 15% per year, including interest payments and capital gains, as bond prices increased.
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Example Series 65 Example Practice Question
An investor is considering purchasing a 10-year bond with a face value of $1,000, a coupon rate of 5%, and a current market price of $950. The investor calculates the bond's yield to maturity to be 5.6%, which considers the annual interest payments of $50 and the potential capital gain of $50 if the bond is held to maturity.
Yield to Maturity, a measure so fine, accounts for interest and capital gains in time. Hold a bond until it's due, and YTM shows the return that's true.
Yield to Maturity (YTM) is the internal rate of return (IRR) of the bond's expected cash flows. It is highly unlikely the Series 65 exam will require you to calculate the IRR since it is cumbersome to do by hand. The Series 65 exam will likely test your intuition about YTM for discount, par, and premium bonds. See the practice questions for examples.
To calculate the Yield to Maturity (YTM) by hand using the iterative guess-and-check method, we must first set up the equation for the present value of the bond's cash flows. Here's the equation we need to solve: $950 = $80 / (1 + r) + $80 / (1 + r)^2 + $80 / (1 + r)^3 + $80 / (1 + r)^4 + ($80 + $1000) / (1 + r)^5 The YTM should be greater than the coupon rate for a bond purchased at a discount, so the initial guess should be higher than the coupon rate. Given the coupon rate of 8% (as $80 is 8% of the $1000 face value), let's start with an initial guess of 9%. 1st Guess (r = 9% or 0.09): $950 < $961.10 = $80 / (1 + 0.09) + $80 / (1 + 0.09)^2 + $80 / (1 + 0.09)^3 + $80 / (1 + 0.09)^4 + ($80 + $1000) / (1 + 0.09)^5 Calculating the right-hand side of the equation with r = 0.09, we get about $961.10, higher than $950. Therefore, our guess for the YTM was too low. 2nd Guess (r = 11% or 0.11): $950 > = $889.12 = $80 / (1 + 0.11) + $80 / (1 + 0.11)^2 + $80 / (1 + 0.11)^3 + $80 / (1 + 0.11)^4 + ($80 + $1000) / (1 + 0.11)^5 Calculating the right-hand side of the equation with r = 0.11, we get $889.12, which is lower than $950. Therefore, our guess for the YTM was too high. Based on these two guesses, the YTM is between 9% and 11%. Let's try splitting the difference with r = 10%. 3rd Guess (r = 10% or 0.10): $950 > $924.18 = $80 / (1 + 0.10) + $80 / (1 + 0.10)^2 + $80 / (1 + 0.10)^3 + $80 / (1 + 0.10)^4 + ($80 + $1000) / (1 + 0.10)^5 With r = 0.10, we get about $924.18, which is closer but needs more iteration. You can continue refining your guess and eventually arrive at 9.3% YTM.