where
P = price of coupon bond C = yearly coupon payment F = face value of the bond n = years to maturity date
In Equation 3, the coupon payment, the face value, the years to maturity, and the price of the bond are known quantities, and only the yield to maturity is not. Hence we can solve this equation for the yield to maturity i. Just as in the case of the fixed-payment loan, this calculation is not easy, so business-oriented pocket calculators have built-in programs that solve this equation for you.4
Let's look at some examples of the solution for the yield to maturity on our 10%-coupon-rate bond that matures in ten years. If the purchase price of the bond is $1,000, then either using a pocket calculator with the built-in program or looking at a bond table, we will find that the yield to maturity is 10 percent. If the price is $900, we find that the yield to maturity is 11.75%. Table 1 shows the yields to maturity calculated for several bond prices.
Table 1 Yields to Maturity on a 10%-Coupon-Rate Bond Maturing in Ten Years (Face Value = $1,000) | |
Price of Bond ($) |
Yield to Maturity (%) |
1,200 |
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