# Calculating bond YTM

Hi!

I am calculating the YTM of a 2-year bond with the following structure:

(1) It paid fixed coupon of 10% for the first year. Coupon paid semi-annually.

(2) It paid float rate + 4% spread for the next year. Coupon paid semi-annually.

Please help me calculating the YTM. I have no remaining knowledge on bond valuation and such.

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Recall that YTM is simply an IRR.

Whip out your calculator and put in the cash flows:

_{0}= initial price of the bond; make sure that it’s negative_{1}= 50 (assuming a 1,000 par)_{2}= 50 (assuming a 1,000 par)_{3}= whatever (based onr+ 400 bp)_{rf}_{4}= 1,000 + whatever (based onr+ 400 bp and assuming a 1,000 par)_{rf}Hit the IRR button to get the semiannual YTM. Double it to get the annual YTM (BEY).

Voilà!

Simplify the complicated side; don't complify the simplicated side.

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Thanks for this. But isn’t the whatever (float) rate unknown at the present? How can I calculate such IRR?

There are two methods for that.

Method 1 (Simplistic approach):Assume the floating rate is flat (e.g. 6 month floating rate held constant for the entire duration of the bond)

Method 2 (More appropriate):Use the current yield curve relevant to the bond and calculate the implied 6-month forward rates. Use the forward rates as the floating rates for future coupon payments.

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You had written the question as if the bond had already matured.

For a bond maturing in the future, use the yield curve: the first payment will be based on the 6-month spot rate, the second on the 6-month forward rate starting 6 months from today, the third on the 6-month forward rate starting 12 months from today, and the fourth on the 6-month forward rate starting 18 months from today.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

http://financialexamhelp123.com/