Bond price and yield: How we calculate
Find the price or yield to maturity (YTM) of a plain fixed-coupon bond.
How we calculate
Yield to maturity (YTM) is the rate at which the present value of future coupons and principal equals the price. It is not a guaranteed realised return. Price is the present value of coupons and principal. The base model settles on a coupon date, so accrued interest is zero and clean equals dirty price.
What the figures mean
- Bond yield to maturity (YTM)
Calculated annualised yield from the purchase price, coupons and maturity repayment. It is not the coupon rate or a guarantee of realised return.
Simple example: A bond with a 5% coupon bought below face value can have a yield to maturity above 5%.
- Valuing future money today
A future amount is reduced using the chosen required return to compare it with money today. This is discounting, not a shop discount or solely an inflation adjustment.
Simple example: €110 in one year at a 10% rate corresponds to €100 today.
Worked example
Example: a bond has €1,000 face value, a 5% annual coupon, five years to maturity, a required yield of 5%, and one coupon per year. Annual coupon is €50; discounting coupons and principal produces a €1,000 clean model price. If required yield rises while other assumptions stay fixed, the model price falls.
The model assumes fixed payments and redemption at face value. It omits default, taxes, fees, call options and accrued coupon interest; the price shown is a clean model price.