1. What is Bond Discount Rate (YTM)?

The bond discount rate, also known as yield to maturity (YTM), is the internal rate of return earned by an investor who buys the bond today at the market price, holding it until maturity. It represents the annualized return considering all coupon payments and the face value repayment.

2. How Does the Calculator Work?

The calculator uses the bond pricing formula:

Where:

• \( C \) — Annual coupon payment ($)
• \( F \) — Face value of the bond ($)
• \( r \) — Discount rate/YTM (decimal)
• \( n \) — Years to maturity

Explanation: The formula discounts all future cash flows (coupons and face value) back to present value using the yield to maturity as the discount rate.

3. Importance of YTM Calculation

Details: YTM is crucial for comparing bonds with different characteristics, assessing investment returns, and making informed fixed-income investment decisions.

4. Using the Calculator

Tips: Enter face value in dollars, annual coupon payment in dollars, years to maturity, and discount rate as a decimal (e.g., 0.05 for 5%). All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between YTM and coupon rate?
A: Coupon rate is the fixed interest rate based on face value, while YTM reflects the total return considering current market price.

Q2: Why does bond price fall when YTM rises?
A: Higher discount rates reduce the present value of future cash flows, lowering the bond's price.

Q3: What does it mean when YTM equals coupon rate?
A: The bond trades at par (price equals face value) when YTM equals the coupon rate.

Q4: How accurate is this calculator?
A: It provides theoretical price for annual coupon bonds. For precise pricing, consider day count conventions and compounding frequency.

Q5: Can this be used for zero-coupon bonds?
A: Yes, simply enter 0 for coupon payment - the formula simplifies to just the face value discounting.