>Hi,
>
>I am trying to understand the Yield to Maturity of a bond. Conceptually I understand it. But I cannot figure out how the following example works (I found this example on a reputable - as far as I know - site).
>
>The purchase price of a bond is $900. Maturity 5 years. Face amount $1000 (I think it is also called par). Coupon is 2%.
>
>So the bond earns (by years)
>

>Yr 1     Yr 2    Yr 3     Yr 4       Yr 5
>$20      $20     $20     $20        $1020  (coupon + principle)  
>

>then they say that the Yield to Maturity of this bond is 4.27%.
>
>How do they calculate the 4.27%?

If you apply 4,27% to 900$, you get 938,43 after one year. Take away the 20 for the coupon, the principal (on principle) is 918,34; after 2nd year that's 957,65. Take of the 2nd coupon, that's 937,65. After three years that's 977,69 (957,69+20 for the coupon). After four years that's 1000,67; apply the rate to the 980,67 for the last year and you get 1022,54 - i.e. 1000$ plus the 5th coupon and they steal 2,54$ on rounding errors and administrative cost. If coupons weren't paid off every year, that would be 1122$ total, i.e. extra 22$ of interest because of the compound rate on the coupons.

That's how I understand that. I have expected a smaller error in the end, it's usually around one permille (yes it's a word, and it means what you usually call "one tenth of one percent" without the ambiguity on "which tenth" and "which percent"). So I may have rounded it off somewhat differently than they did, or the above calculation is completely wrong but accidentally close.

I expect all the banks will yield to the maturity of my explanations.