CALCULATION OF YTM
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What does YTM stand for in bond valuation?
YTM stands for Yield to Maturity, which is the total return anticipated on a bond if it is held until it matures.
What is the primary purpose of calculating YTM for a bond investor?
To determine the total annualised return if held to maturity.
How is YTM defined in the context of debt instruments?
YTM is the internal rate of return (IRR) of a bond, i.e., the discount rate that equates the present value of all future cash flows (coupon payments and face value) to the bond's current market price.
Which method is most accurate for calculating YTM: approximate formula or trial-and-error?
Trial-and-error with interpolation is more accurate.
What are the cash flows considered while calculating YTM of a bond?
The cash flows include periodic coupon payments received during the bond's life and the face value (par value) repaid at maturity.
How does increasing market interest rates affect the YTM of existing bonds?
YTM rises while the market price of the bond falls.
What is the relationship between YTM and the current market price of a bond?
YTM and bond price are inversely related — when the market price rises, YTM falls, and when the market price falls, YTM rises.
What is the approximate YTM formula used by bankers for quick estimation?
YTM ≈ [Coupon + (Face Value − Price)/n] / [(Face Value + Price)/2].
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