>>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%?
>
>From Investopedia:
>"Calculations of yield to maturity assume that all coupon payments are reinvested at the same rate as the bond’s current yield, and take into account the bond’s current market price, par value, coupon interest rate and term to maturity. YTM is a complex but accurate calculation of a bond’s return that can help investors compare bonds with different maturities and coupons."
>
>Unless you buy a zero coupon bond, it's almost impossible that you'll get the same rate of return on re-invested coupon payments, so you'll probably never get that yield.
>
>Also it doesn't consider the different tax treatments that might apply coupon payments and capital gains.
>
>However, it's a good way to compare two bonds with basically similar characteristics.

Thank you.