- 1). Ask for the nominal yield on your bond. The nominal rate is often called the coupon rate. This is the rate the issuer will pay you on the number of bonds you own. Don't accept a number such as "effective yield" or "current yield." You have to start with the nominal yield, such as 7 percent. This means the issuer is paying 7 percent interest for each bond bought at par, or $100. Multiply the nominal yield times $100 to get the coupon payment.
- 2). Calculate the current yield. This number comes into play if you are paying a discount or a premium for the bond. Par is $100. A discount is anything below that amount, and a premium is anything above that amount. Divide the nominal rate by the purchase price and you will have the current yield. If you buy at a discount, you will find a yield above the coupon rate. If you buy at a premium, you will find a yield below the coupon rate.
- 3). Calculate the yield to maturity by using the nominal rate, the current yield and the number of years to maturity. Start with the nominal rate times $100 (the bond at par). This is your coupon payment.
- 4). Figure your total discount. That is, at how much below par did you buy the bond?
- 5). Subtract your total discount from the par price ($100) to get your average price.
- 6). Divide the average price by the number of years to maturity. This is your annual discount.
- 7). Add the annual discount to the coupon payment. Divide this figure by the average price and that will give you the yield to maturity of the bond.
Calculate the Nominal Yield
SHARE
