- 1). Obtain the price of the bond. This is the price of the bond when purchased. Assume the bond is priced at $95.
- 2). Determine the amount of each annual coupon payment. Assume the coupon is $5.
- 3). Determine the number of payments the bond still has to make. Assume the bond has two and a half years to go before maturity.
- 4). Determine the value of the bond at maturity. Assume the bond pays $100 at the end of its maturity.
- 5). Use the bond formula to find the yield through trial and error. The formula is price equals the annual coupon multiplied by one, minus one, divided by one, plus the yield to maturity, all divided by one, plus the value of the bond at maturity, multiplied by one, divided by one, plus the yield to maturity to the exponential power, equal to the annual coupon. Using the previous example, the calculation is: 95 equals 5 multiplied by one, minus one, divided by one, plus the yield to maturity to the 2.5 power, divided by one, plus $100, multiplied by one, divided by one, plus the yield to maturity to the 2.5 power.
- 6). Find the yield to maturity by substituting different rates in for yield to maturity, to see which one equals the price. In this example the yield to maturity is 7 percent.
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