Bond YTM Questions
How would you do bond YTM calculations during interviews? example: what’s the YTM on a bond that has a price of $50, face value of $100, interest/coupon rate of 10%, and matures in 1 year?
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and does anyone know if there’s a general formula you could use for these questions??
approx ytm = {coupon payment + ((par value - purchase price)/years until maturity)}/{(par value - purchase price)/2}
look up “bond yield approximation formula” on google images
^this is the way to quickly do it. Works as long as you have coupon payments.
if there is no coupon payment, it’s just (face value-buying price)/buying price
wouldn’t it just be 110/50 - 1? So 120%? doubt you’ll get full recovery though if you’re trading at 50...
I would whip out my HP12c and blow the interviewer away with my ability to use the financial keys and RPN.
OfferSecuredbruh what kind of psycho would ask you to do that
HL RX asked me to do YTM in my head for SA
Op: if you think about it fundamentally you can divide the problem into (1) capital appreciation + (2) current yield.
(1) (nominal - market) / maturity
+
(2) coupon / market
=
(3) YTM
You’ll find this works best for bonds trading around par. So eg if you have a 12% trading at 80 with maturity in 3yrs, (1) 20 / 3 = 6.66 + (2) 12/80 = 15 = (3) 15 + 6.66 = 21.66, that’s as close as you’re gonna get without a calculator
Make sure you understand why this works too. What is YTM conceptually? When would you use it over CY? When would you not?
12% trading at 80 with maturity in 3 years can also be done as
(12*3/80+20/80)/3= 20.83%
Not sure which is closer to the actual number or which firms prefer which but I know HL Rx prefers the capital appreciation plus current yield method outlined by prestigewhore
.
Was this for IBD or S&T?
they’re more likely to ask you conceptual questions, for example, if YTM is 7% and YTC is 9% what is the YTW? Why? Why do we use YTW? In what scenario would the bond price to maturity, and in what scenario would the bond price to the call? (Hint: there’s a number answer to that)
what's the answer?
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