# 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.

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!

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.