- 1). Assume you are looking at buying a five year bond with a coupon rate of 4 percent. The bonds coupon of $1000 is purchased at a premium of $1100.
- 2). Calculate the premium adjusted paid by subtracting the purchase price from the coupon: ($1100 - $1000)/5 = $100/5 = $20 per year.
- 3). Find the real coupon paid annually. A $1000 bond with 4 percent would get $40 annually.
- 4). Subtract the real coupon paid by the premium adjusted paid: $40 - $20 = $20. This is the adjusted annual payment.
- 5). Calculate the median price of the bond: (Premium Price + Coupon Price)/2 = ($1100 + $1000)/2 = $1050.
- 6). Divide the median price by the adjusted annual payment: $20/$1050 = 1.9 percent
This is the yield-to-maturity or YTM.
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