1. What Is Yield To Maturity (YTM)?

Yield to Maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It's expressed as an annual rate and considers all coupon payments and the difference between the bond's current market price and its face value.

2. How To Calculate YTM On BA II Plus

To calculate YTM on a BA II Plus financial calculator:

Steps:

1. Press [2nd] [CLR WORK] to clear previous values
2. Enter number of periods and press [N]
3. Enter coupon payment and press [PMT]
4. Enter negative price and press [PV]
5. Enter face value and press [FV]
6. Press [CPT] [I/Y] to calculate yield

3. Importance Of YTM Calculation

Details: YTM is a critical measure for bond investors as it allows comparison between different fixed-income securities. It represents the annual return an investor can expect if they hold the bond until maturity and all payments are made as scheduled.

4. Using The Calculator

Tips: Enter the number of periods until maturity, the coupon payment amount, the current market price of the bond, and the face value. The calculator will provide an estimated YTM. Note that this is an approximation - for precise calculations use a financial calculator.

5. Frequently Asked Questions (FAQ)

Q1: Why is the price entered as negative on the BA II Plus?
A: The BA II Plus uses cash flow convention where money paid out (like purchasing a bond) is negative, and money received (coupon payments and face value) is positive.

Q2: What's the difference between YTM and current yield?
A: Current yield only considers the coupon payments relative to the price, while YTM considers both coupon payments and any capital gain or loss if held to maturity.

Q3: Does YTM assume reinvestment of coupons?
A: Yes, YTM assumes that all coupon payments are reinvested at the same rate as the current YTM.

Q4: When is YTM not accurate?
A: YTM may not be accurate if the bond has embedded options (like callable bonds) or if the coupon payments cannot be reinvested at the calculated YTM.

Q5: How does YTM relate to bond prices?
A: YTM and bond prices have an inverse relationship. When YTM increases, bond prices decrease, and vice versa.