How to Find Yield to Maturity in Excel

Welcome to this post where we will show you a quick and straightforward way to find Yield to Maturity (YTM) in Microsoft Excel. Whether you’re a corporate finance professional, a student of finance, or an individual who wants to take control of their finances, Excel is an essential tool for various financial calculations, one of which is the Yield to Maturity (YTM).

Yield to Maturity (YTM) is a critical metric that measures the total return expected on a bond if held till maturity. But calculating YTM can be a bit tedious, especially for bonds that pay semi-annual or quarterly interest payments. Fortunately, Microsoft Excel has a built-in function that can help you perform this calculation quickly and

What is Yield to Maturity (YTM)?

Yield to Maturity (YTM) represents the total return you can expect to receive from a bond if you hold it till it matures. To put it simply, it is the average annual rate of return you will receive if you invest in a bond and hold it to maturity, taking into account the bond’s current price, its face value, the coupon payment, and the time remaining until maturity. Hence, it is a crucial calculation for anyone trying to analyze bonds and make informed investment decisions.

Using Excel to Find Yield to Maturity

Excel has a built-in function called YIELD that calculates the Yield to Maturity (YTM) of a bond. To use this function, here are the steps:

Step 1 – Input Your Data

First, gather the necessary data. This includes the bond’s face value, the annual coupon rate, the bond’s price, the number of years to its maturity, and the payment frequency. Enter these data into Excel, creating column headers as needed.

Step 2 – Input the YIELD Function

Once you have inputted all the required data into Excel, input the following formula into your desired cell: =YIELD(Settlement date, Maturity date, Rate, Price, Redemption, Frequency, [Basis]).

Here is what each element of the formula means:

• Settlement date is the date that you purchase or settle onto the bond.
• Maturity date is the date when the bond will finally come due.
• Rate is the interest rate at which the bond is issued.
• Price is the current market price of the bond.
• Redemption is the bond’s face value or the value the bond will be redeemed by the issuer at maturity.
• Frequency is the number of compounding periods per year; in most cases, it is either semi-annual or quarterly.
• Basis is the type of day-count basis used to calculate the bond’s interest.

Step 3 – Input Your Data into the YIELD Function

After typing in the formula, select the cells containing the input you want to fill each argument of the YIELD function, pressing F4 to toggle relative or absolute references as needed. Once you’ve filled in all the data, press ‘Enter.’

The cell that contains the formula will now show the bond’s YTM as a percentage value.

Calculating Yield to Maturity (YTM) is a crucial step in analyzing bond viability, and doing it by hand can be tedious and time-consuming. Fortunately, tools such as Microsoft Excel provide quick and easy methods to perform this calculation. By following the steps in this post, you can calculate YTM for any bond you want to evaluate, giving you one more important tool in your financial analysis toolkit.

The Importance of Yield to Maturity

Yield to Maturity (YTM) is an essential concept for anyone who invests in bonds or manages a bond portfolio. It helps to determine the potential profits of a bond investment and lets you compare the expected return of a bond against other investments with different maturities, risk profiles, or interest rates.

While some online tools and financial software can simplify the YTM calculation process, it’s still important to understand how to calculate it manually in Excel. Not only does it help you detect errors or discrepancies in the software, but it also lets you customize the inputs and assumptions according to your targeted investment preferences and market conditions.

Limitations of YTM Calculation

While YTM is a useful metric for gauging a bond’s profitability and risk, it’s important to note that it comes with certain limitations. For instance:

• It assumes that you will hold the bond to maturity–If you sell the bond before it matures, your actual return will likely be different from the YTM estimate.
• It assumes that the issuer will meet all the bond’s contractual obligations–If the issuer defaults, declares bankruptcy, or performs other actions affecting the bond’s creditworthiness, the actual yield may differ from the YTM.
• It assumes a static yield curve–If the market interest rates, inflation, or other economic factors change over time, the price and yield of the bond will fluctuate, leading to possible deviations from the YTM.

That said, YTM remains a valuable concept for investors to estimate the bond’s worth and inform their investment decisions, but it should not be the only factor to consider. Other factors, such as the bond’s credit rating, liquidity, issuer’s financial performance, tax implications, and personal investment goals, should also be evaluated to ensure a sound investment strategy.

Yield to Maturity (YTM) is an essential metric for bond investors, and learning how to calculate it manually in Excel is a valuable financial skill. By following the above steps and understanding the importance and limitations of YTM, you can generate a more informed analysis of your bond investments and improve your overall portfolio performance.

FAQs About Yield to Maturity in Excel

Here are some of the most common questions people have about calculating Yield to Maturity (YTM) in Excel:

What is the formula for Yield to Maturity in Excel?

The YIELD formula in Excel helps you to calculate the Yield to Maturity of a bond by entering the following information (arguments) into the formula:

=YIELD(Settlement date, Maturity date, Rate, Price, Redemption, Frequency, [Basis]).

Can Excel calculate the Yield to Maturity for different bond types?

Excel’s YIELD function can be used to calculate Yield to Maturity for all types of bonds, including bonds with annual, semi-annual, or quarterly coupon payments. However, the number of periods (frequency) will vary based on the payment frequency of the bond.

What should I do if Excel shows #NUM! as the result for the YIELD function?

If the YIELD function returns the #NUM! error, it may be because the inputs are incorrect, and the bond’s YTM is outside the range of possible values. Ensure that you correctly entered all the required inputs and that the redemption value is less than or equal to the bond’s present value. You may also try adjusting the Rate if you continue to receive the error message.

Does Yield to Maturity include the bond’s commission?

No, when calculating Yield to Maturity, we do not consider the bond commission. Instead, it is only based on the purchase price and the future cash flows received from the bond. The commission is considered a separate one-time expense associated with buying a bond.

How does YTM differ from current yield?

The current yield of a bond is the annual income expected from the bond divided by its current market value, expressed as a percentage. It only considers the current interest rate and does not account for any gains (or losses) if the bond is held to maturity. Conversely, Yield to Maturity considers the future cash flows and assumes maturity and reinvestment of each earned coupon payment at the same rate of YTM.