Pricing Treasury, Corporate Bonds and Municipal Bonds

• Yield to maturity calculations require the following information: the price you paid for the bond, the maturity value of the bond also called the par amount (usually $1000), and the semiannual coupon payment. Calculations can be determined from online calculators, Excel spreadsheets or pocket calculators. Accurate estimates can be derived from pen and pencil calculations.
  
  For premium bonds, bonds trading over par, the yield to maturity will be a function of the coupon payments received less the amount of amortization needed to reduce the value of the bond to par at maturity. For discount bonds, the yield to maturity will be a function of the coupon payments received plus the amount of accretion needed to value the bond at par at maturity.
  
  

Quick Techniques for Computing Yields

• For a premium bond, take the coupon amount and subtract the annual amortization. For example, a 10 year bond with a price of 106 and an annual coupon of 5 percent would calculate as follows. 6 divided by 10 is an amortization of .6 or $6. An annual coupon of 5 percent is $50. $50 minus $6 is $44. $44 divided by $106 is 4.15 percent yield to maturity.
  
  For discount bonds, assume the same situation as above with a price of 90. The calculation is 10 points accretion divided by 10 years or 1 point or $10. Add $10 to the $50 dollar of coupon for a total of $60. Divide 6 by 90 and get a yield to maturity of 6.67 percent.
  
  

Other Calculation Techniques

• Use online or handheld calculators for computing yield to maturity calculations. Enter the coupon, maturity, settlement date (the date you want to calculate the price and accrued interest from). Make certain no call feature, particularly with premium bonds, is effective. Know that accrued interest is added to the bond price after the calculation of the bond price takes effect. Accrued interest increases every day up to the coupon date.
  
  Create bond yields using spreadsheet programs programs by inserting the YIELD function and following directions. Use Resources for a more detailed instruction set.