Deeply discus about
1)Yield to maturity of a bond
2)Bond duration.
Note.Considering
Yield to maturity of a bond is defined as the bond return one can expect if it is held till maturity.
This rate is also the discount rate that is used to calculate the value of a bond.
For example. if there is a 5 year , 6% annual coupon bond with face value of $1000 and YTM or yield to maturity as 7%, then , the Present Value of the Bond is -
Present value of the bond = Sum of Present values of all coupon payments + Present value of the face value
Present value of the bond = C1/(1+YTM)^1 + C2/(1+YTM)^2 + C3/(1+YTM)^3+ C4/(1+YTM)^4 + C5/(1+YTM)^5 + FV/(1+YTM)^5
where, C1,C2, C3, C4, C5 are the coupon payments and FV = Face value
| Face Value | $1000 | ||||
| Coupon rate | 6% | per annum | |||
| YTM | 7% | ||||
| Years | 1 | 2 | 3 | 4 | 5 |
| Cash flows | 60 | 60 | 60 | 60 | 1060 |
| PV | 56.07 | 52.41 | 48.98 | 45.77 | 755.77 |
Present Value of the bond = Sum of all present values of each year
Present value of the bond = $959
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