How to calculate yield to maturity excel
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Yield to maturity (YTM) is a crucial financial metric that calculates the total return anticipated on a bond if it’s held until maturity. YTM takes into account the bond’s current market price, its par value, coupon interest rate, and time to maturity. In this article, we will demonstrate how to calculate yield to maturity using Excel.
Step 1: Gather necessary bond information
To calculate YTM, you’ll need the following data:
1. Current market price of the bond (P)
2. Par value of the bond (FV)
3. Coupon interest rate (expressed as a percentage; C)
4. Time to maturity in years (t)
Step 2: Create your Excel spreadsheet
Open Microsoft Excel and create a new worksheet. Input the gathered data into separate cells. For example:
A1: Current Market Price
B1: Par Value
C1: Coupon Interest Rate
D1: Time to Maturity in Years
In cells A2, B2, C2, and D2 enter the respective values you gathered in Step 1.
Step 3: Calculate Yield to Maturity using the RATE function
Use Excel’s built-in RATE function to compute the YTM. The syntax for the RATE function is as follows:
RATE(nper, pmt, pv, [fv], [type], [guess])
Where:
– nper = Number of periods (Time to Maturity * Payments per Year)
– pmt = Periodic payment amount
– pv = Present value of payments
– fv = Optional future value argument (defaults to 0)
– type = Optional Type specifying whether payments are due at end or beginning of period (defaults to end)
– guess = Optional initial guess for interest rate (Defaults to 0 if omitted)
Since bonds typically make semi-annual coupon payments, you’ll need to adjust the inputs for the RATE function accordingly.
In cell E1, enter ‘Yield to Maturity’ as the label. In cell E2, insert the following formula:
=RATE(D2*2, (C2/100)*B2/2, -A2, B2)*2
The formula calculates the YTM by considering semi-annual coupon payments and multiplying the final value by 2 to obtain an annualized rate.
Step 4: Review your results
Press Enter to display the calculated Yield to Maturity in cell E2. Format this cell as a percentage with a desired number of decimal places.
That’s it! You’ve successfully calculated yield to maturity using Excel. The YTM serves as an important tool for investors and financial analysts seeking to compare bonds with different maturities, coupon rates, and market prices.