# 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.

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Recall that YTM is simply an IRR.

Whip out your calculator and put in the cash flows:

• C0 = initial price of the bond; make sure that it’s negative
• C1 = 50 (assuming a 1,000 par)
• C2 = 50 (assuming a 1,000 par)
• C3 = whatever (based on rrf + 400 bp)
• C4 = 1,000 + whatever (based on rrf + 400 bp and assuming a 1,000 par)

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.

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