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A pleasant day to all, my name is Katherine Miclat from the humble BSAIS 2D, and I am very much
excited to discuss to you my topic which YIELD TO MATURITY of bonds. That’s right, I am the reporter,
again.

If you recall our lessons about corporate bonds, Corporate Bonds work when the company borrowed
certain amount of money and promises to repay it in the future.

As you can see

The company gets the capital it needs and in return the investor is paid a pre-established number of
interest payments at either a fixed or variable interest rate. When the bond expires, or "reaches
maturity," the payments cease and the original investment is returned. If you are an investor and you
would like to know how much of your corporate bonds will yield in the future then you have come to
the right place because I will discuss Yield to Maturity

But before that, i would like to present to you the objectives for my discussion

Objective 1,2,3

And where know done, let us know start with bond yields

WHAT IS BOND YIELDS

According to Gitman (slide)

In simple words

is the return to an investor from the bond's coupon and maturity cash flows.

is a figure that shows the return you get on a bond

IT ASSESS BONDS’ PERFORMANCE

it answers the question what return would this bond give me?

THAT IS BOND YIELDS

IN THE BOOK, Principles-of-Managerial-Finance-13 th EDITION BY GITMAN AND ZUTTER

THREE MOST WIDELY CITED BOND YIELDS

What Is the Current Yield?

Current yield is an investment's annual income (interest or dividends) divided by the current price of
the security. This measure examines the current price of a bond, rather than looking at its face value.
Current yield represents the return an investor would expect to earn, if the owner purchased the bond
and held it for a year. However, current yield is not the actual return an investor receives if he holds a
bond until maturity.
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What is Yield to Maturity?

Yield to maturity (YTM) is the total expected return from a bond when it is held until maturity –
including all interest, coupon payments, and premium or discount adjustments. The YTM formula is used
to calculate the bond’s yield in terms of its current market price and looks at the effective yield of a
bond based on compounding. This differs from the simple yield using a dividend yield formula.

-is the discount rate that equates the today’s bond price with the present value of the future cash flows
of the bond.

What Is Yield To Call?

Yield to call (YTC) is a financial term that refers to the return a bondholder receives if the bond is held
until the call date, which occurs sometime before it reaches maturity. This number can be
mathematically calculated as the compound interest rate at which the present value of a bond's future
coupon payments and call price is equal to the current market price of the bond.

Yield to call applies to callable bonds- which are debt instruments that let bond investors redeem the
bonds—or the bond issuer to repurchase them—on what is known as the call date, at a price known as
the call price.

SA MADALING SALITA, the call date of a bond chronologically occurs before the maturity date.

Do take note out of the three, according to Gitman, the simplest yield to measure is the current yield.
The formula is simply annual interest payment divide the current price.

For example, a $1,000 par value bond with an 8 percent coupon interest rate that currently sells for
$970 would have a current yield of 8.25% 3(0.08 * $1,000) , $970] . This measure indicates the cash
return for the year from the bond.

However, because current yield ignores any change in bond value, unlike the other two, it does not
measure the total return.

AS I MENTIONED EARLIER, CURRENT YIELD represents the return an investor would expect to earn, if
the owner purchased the bond and held it for a year. However, current yield is not the actual return an
investor receives if he holds a bond until maturity.

HOWEVER THE OTHER TWO

Both the yield to maturity and the yield to call measure the total return.

As much as I would like to dig deeper on these three Bond Yields but I apologize but we will only focus in
calculating Yield to Maturity.

BAT KO PA DINISCUSS
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I only gave a simple background about bond yields in order for you to have an idea ON WHAT WE ARE
ABOUT TO TACKLE

YIELD TO MATURITY

When investors evaluate bonds, they commonly consider yield to maturity (YTM). This is the compound
annual rate of return earned on a debt security purchased on a given day and held to maturity.

ASSUMINGthat the issuer makes all scheduled interest and principal payments as promised HA

the total return anticipated ON BOND OR MEANING INAASAHAN NA BABALIK SAYO AFTER INVESTING
ON A PARTICULAR BOND if the bond is held until it matures. ... ADDITIONAL INFO, IT IS OTHER TERM FOT
the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity,
with all payments made as scheduled and reinvested at the same rate.

INUUULIT ULIT KO LNG FOR THAT TO SINK IN

CALCULATING YTM

YTM is typically expressed as an annual percentage rate (APR). It is determined through the use of the
following formula:

Where:

C – Interest/coupon payment

FV – Face value of the security

PV – Present value/price of the security

t – How many years it takes the security to reach maturity

IMPORTANT NOTE

It’s important to understand that the formula is only useful for an approximated YTM

MEANING IT IS ONLY AN ESTIMATION BUT DON’T WORRY THERE IS ANOTHER FORMULA IN COMPUTING
FOR YTM
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BOND PRICE FORMULA

IT USES FORMULA OF BOND PRICE

Mathematically speaking, we cannot isolate the variables in order to find the YTM

There is only one way

Trial and error

This is tedious, complicated and not to mention exhausting.

You might think walang kwenta na dinidiscuss ko because the other formula only provide an estimation
of YTM-not the exact YTM and yung isa makukuha mo lng after ilang trial and errors, but no. This is were
it becomes more interesting.

Is it possible to find the exact amount of ytm without undergoing the trial and error process? Of course
it is. And by SOLVING YIELD TO MATURITY USING EXCEL

To speed up the calculation, financial calculators and spreadsheets are often used.

Unlike solving manually, excel are pretty convenient, effective and superrrrr accurate. Indeed very useful

EXCEL

Introduce 3 function

Gitman only mentioned the irr but I added additional functions which is the yield and rate function so
that you would have options in solving your ytm and we’ll discuss it one by one

IRR FUNCTION

The Excel IRR function is a financial function that returns the internal rate of return (IRR) for a series of
cash flows that occur at regular intervals.

Purpose

Calculate internal rate of return

Syntax

=IRR (values, [guess])

Arguments

values - Array or reference to cells that contain values.

guess - [optional] An estimate for expected IRR. Default is .1 (10%).

Values = The future cash flows of the bonds. The values must contain a positive value and a negative
value. The bond cost $938.40, so it is a negative value at the start of the ‘Payment’ column. And at the
end of the bond maturity, we get the coupon payment and the face value back, so it is $1030. Between
these two, we get $30 in every period. These are the cash flows for the next 5 years (10 periods).

Guess = It is just a guess value that could be your internal rate of return. I did not use this value.

Version

Excel 2003

Usage notes

The internal rate of return (IRR) is the interest rate received for an investment with payments and
income occurring at regular intervals (i.e. monthly, annual). Payments are expressed as negative values
and income as positive values. Amounts can vary, but intervals need to be the same. The first value is
negative, since it represents an outflow.

Excel uses iteration to arrive at a result, starting with the guess (if provided) or with .1 (10%) if not. If an
accurate IRR can't be calculated after a fixed number of iterations, the #NUM error is returned. A better
guess will prevent this error.

Notes

The values array must contain at least one positive value and one negative value.

Values should be in chronological order.

If IRR returns the #NUM! or an unexpected result, adjust guess.

YIELD FUNCTION

YIELD is an Excel function that returns the yield to maturity of a bond given its coupon rate, current
price, principal amount and coupon payment frequency per year.

Syntax

The formula’s syntax is:

YIELD(settlement, maturity, rate, pr, redemption, frequency, [basis]

Settlement refers to the settlement date i.e. the reference date for pricing,

maturity is the maturity date i.e. the date on which the security-holder receives principal back,

Pr stands for the current market price of the security;

redemption is the value received by the bond-holder at the expiry of the bond representing the
repayment of principal;

frequency refers to number of periodic interest payments per year

and [basis] is an optional argument specifying the day-counting basis to be used.

RATE FUNCTION

The syntax of RATE function:

RATE (nper, pmt, pv, [fv], [type], [guess])

Here,

Nper = Total number of periods of the bond maturity. Years to maturity of the bond is 5 years. But
coupons per year is 2. So, nper is 5 x 2 = 10

Pmt = The payment made in every period. It cannot change over the life of the bond. The coupon rate is
6%. But as payment is done twice a year, the coupon rate for a period will be 6%/2 = 3%. So, pmt will be
$1000 x 3% = $30.

PV = Present value of the bond. It is the amount that you spend to buy a bond. So, it is negative in the
RATE function.

FV = Future value of the bond. It is actually the face value of the bond. When the bond matures, you get
return the face value of the bond. In our case, it is $1,000.
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Type = Type can be either 0 or 1 or omitted. If 0 or omitted, the interest payment (coupon payment or
pmt) is done at the end of the period. If the type is 1, the coupon payment is done at the beginning of
the period.

Guess = It is just a guess value. I did not use it. In most cases (if not all cases), don’t use this value.

I also have used another term in the formula. It is an Annualizing Factor.

What is the Annualizing Factor?

RATE function returns the interest rate for a period. In our case, there are two periods per year (coupons
per year is 2). So, to get the yearly interest rate, we multiplied the RATE value by 2 (cell C7).

To conclude my discussion i would like to end it wait a question why is it important to define the yield of
maturity of a bond

IMPORTANCE OF YTM

The primary importance of yield to maturity is the fact that it enables investors to draw comparisons
between different securities and the returns they can expect from each. It is critical for determining
which securities to add to their portfolios. It’s also useful in that it also allows the investors to gain some
understanding of how changes in market conditions might affect their portfolio because when securities
drop in price, yields rise, and vice versa.