Explore BrainMass

Calculation of the yield to maturity for bonds

I'm trying to understand a formula in a CPA review book for the calculation of the yield to maturity for bonds. The formula is as follows:

YM = Annual interest payment + Principal Payment -Bond Price /
Number of years to maturity / 0.6 (Price of bond) + 0.4 (Principal payment)

The factors 0.6 and 0.4 are some type of weighted numbers I believe. However, I'm not sure how they are derived. Are they standard for this calculation or were they calculated somehow somewhere else? The book I'm using doesn't indicate. I'm no longer in school, however, am trying to, on my own, study for the CPA exam.

Solution Preview

The actual formula for calculating the yield to maturity is

Current market price of Bond P= E(1,n) I/(1+YTM)^t + F/(1+YTM)^n
Where E(1,n) represents summation of ...... for value of n varying from 1 to n.
P=Current market price of bond
I=Coupon per period
YTM is yield to maturity
t varies from 1 to n
F=Par value of bond
n= Total number of coupon period

For example if we have a ...

Solution Summary

Calculation of the yield to maturity for bonds is given. The annual interest payments and principal payments are discussed.