>>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.

Wow. This is very complicated. I expected a simpler explanation. I found another site where the formula for the YTM formula is shown. And it is very complicated. My conclusion: just stay with the conceptual understanding that can be used in comparing two or more bonds. The actual numbers are not so easy to arrive at.
One suspect of the site where I got the above example is that they spelled 'principle' as 'principal' :)
Thank you.