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8. Value a Bond and Calculate Yield to Maturity (YTM)

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Download Preston's 1 page checklist for finding great stock picks: http://buffettsbooks.com/checklist Preston Pysh is the #1 selling Amazon author of two books on Warren Buffett. The books can be found at the following location: http://www.amazon.com/gp/product/0982967624/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=0982967624&linkCode=as2&tag=pypull-20&linkId=EOHYVY7DPUCW3WD4 http://www.amazon.com/gp/product/1939370159/ref=as_li_tl?ie=UTF8&camp=1789&creative=9325&creativeASIN=1939370159&linkCode=as2&tag=pypull-20&linkId=XRE5CA2QJ3I2OWSW In this lesson, we began to understand the important terms that truly value a bond. Since most investors will never hold a bond throughout the entire term, understanding how to value the asset becomes very important. As we get into the second course of this website, a thorough understanding of these terms is needed. So, be sure to learn it now and not jump ahead. We learned that there are two ways to look at the value of a bond, simple interest and compound interest. As an intelligent investor, you'll really want to focus on understanding compound interest. The term that was really important to understand in this lesson was yield to maturity. This term was really important because it accounted for almost every variable we could consider when determining the true value (or intrinsic value) of the bond. Yield to Maturity estimates the total amount of money you will earn over the entire life of the bond, but it actually accounts for all coupons, interest-on-interest, and gains or losses you'll sustain from the difference between the price you pay and the par value.
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Text Comments (186)
Jur Goumans (28 days ago)
Do you mean with years remaining the current date (the date of today) until the date of maturity? Or is it something else like the date of the next coupon payment until the date of the last coupon payment (date of maturity)?
I dont understand how he calculates de compunt interest .
Kamala Kannan (1 month ago)
You are great very useful info in simplistic form. Sir can I ask you question if bad news like crash or ression happens and fundamentally strong stocks also loose their value in that point of time can we start accumulation of those stocks is that the right way Pls reply
morallifeadvisory (2 months ago)
You need to make a practical exercise for this
Princi Tyagi (3 months ago)
in the case of par gain and loss how to find ytm
Robin Hayes (3 months ago)
This was a huge help!
Mark Patjowls (4 months ago)
Hi I'm Jesse, bond investor.
MEGA-Testberichte (5 months ago)
Awesome series. Very interesting understanding the system.
Sagar Gourimath (6 months ago)
If we reinvest the amount gained through bond A in bond B, bond B would be a separate investment altogether, how can we consider that for evaluating the returns of bond A?
BoyBoy Jason (8 months ago)
Is this the same equation being use to calculate the intrinsic value of stock just that we change C to annual dividend YTM to annual growth rate of the book value F to current book value of the company?
Zachary Boren (8 months ago)
I'm having a bit of trouble understanding this. I know each of the three situations illustrated are examples. However, I can't seem to understand why someone would pay more than the face value for a bond. Is this a common thing? Is there some sort of advantage to paying a premium???
NILAM SAHA (8 months ago)
Great video 👍but how is the yield to maturity of 3.3% nd 7.2% done? Couldn't figure it out😕
D. Dstag (9 months ago)
Why is the YTM equation shown (13:13) so complex? Made this based off explanation. Is my equation wrong? YTM ={ tC - (F-Bo) } / { t/F}
John Cheeseman (9 months ago)
Preston, Just started watching your videos and want to let you know that you are a great teacher. Thank you.
Winston Quezada (11 months ago)
Do you have a video of bonds and taxation?
Hidan (1 year ago)
Vatsal Vyas (1 year ago)
Love the series, VERY HELPFUL
Phillip Kaye (1 year ago)
Hi Preston, thanks for all your great work. Please can you explain how you got the figure of 3.3% for the ytm at a bond price of $1200. Seen the other comments but none the wiser.
gaini24 (1 year ago)
thank you so much my prof is useless
Ric Flair (1 year ago)
Amazing explanation, thanks Preston.
Eric Brändli (1 year ago)
I understand how to calculate the different yields just how you explained. But how can I decide whether I should buy, hold or sell? Is it only the yield or are there other factors to pay attention to? I already watched the whole course one and this is my only question. Your tutorials are fantastic. :)
Jesse (1 year ago)
YTM is more applicable to determining whether a bond is worth buying or not as serves as a predictor of the returns on your investment. when it comes to decisions to sell or hold you'll mostly look at the current interest rates in the bond market, returns expected in the stock market or even possible indications that a company or state is likely to default on payments. given that you have a bond with higher interest rates than the market is able to offer, you can choose to sell it for a quick flip if you do not want to hold the bond to maturity and reinvest in other securities or if you want to exit a bond that is likely to default. it is also possible that markets shift and stocks start to generate a higher ROI as compared to bonds and you want to shift the diversification of your investments more towards stocks as compared to bonds. when it comes to selling bonds or holding to maturity it is really an individual decision after considering your circumstances and the market conditions at any point of time.
Kenneth Chng (1 year ago)
Hi I would like to ask a questions, Is the Annual Coupon Rate afloat or fixed Rate .
Keegan Nicholls (1 year ago)
Just rediscovered your tutorials Preston now that I'm taking another finance course at university. You have a fantastic way of explaining these concepts in a simple, yet thorough manner. Thank you!
CRAZY INDIAN (1 year ago)
there is a bit error in calculation of yield to maturity. the coupon payments should be 1078$ instead, which is making futher calculations incorrect. correct me if i am wrong..
Eric H (1 year ago)
Viktor Mirchev (1 year ago)
Broker fees are included in the bond price. That's why face value and bond price rarely match.
Nick Taniguchi (1 year ago)
Okay, but what is YTM actually a measure of? How do the factors presented in 9:50 on actually affect YTM? What does it mean that it is 3.3%? Is YTM just a replacement for yield% that incorporates the time you buy the bond?
thato daniel (1 year ago)
I don't understand to calculate yield to maturity of zero coupon bond with face value of $1000 current price of $940 and maturity of 5.0 years? Recall that the compounding interval is 6 months and the ytm like all interest rate is reported on an annualized basis
thato daniel (1 year ago)
I don't understand to calculate yield to maturity of zero coupon bond with face value of $1000 current price of $940 and maturity of 5.0 years? Recall that the compounding interval is 6 months and the ytm like all interest rate is reported on an annualized basis
Kushagra Kumar (1 year ago)
I am getting Coupon payments = 1078 i.e. Coupon payments = 1000*(1+5/100)^15 - 1000
ThatDamnedYankee (1 year ago)
From an absolute NOOB...thanks. ; )
Terry Kleemann (1 year ago)
Hi PrestonI appreciate you might be too busy to help but I've been given a problem in an assignment and after several emails to the Institute I seem to be getting more confused. Anyway, I have set out the problem below if you are able to help. B. Suppose the chosen company and its competitor decided to expand their operations by issuing bonds. You are required to value bonds issued by two companies selected in part A) above. Both bonds mature in five years and both have a face value of $100 and both pay a coupon rate of 8%. Assume your selected company’s bond (rated as A+ by rating agencies) pays annual coupons while its competitor (rated as B+ by rating agencies) pays semi-annual coupons.The yield to maturity (required return) on Australian corporate bonds of different ratings and different maturity periods provided in the following table:  Rating A(A+ A or A-) Rating B(B+ B or B-) 3 Years 3.04% 3 Years 3.68% 5 Years 3.50% 5 Years 4.0%7 Years 3.93% 7 Years 4.51%10 Years 4.39% 10 Years 5.00% Should these two bonds sell at identical prices or would one be worth more than the other? What prices do you obtain for these bonds? Explain the difference in the value of the bonds. What I am particularly confused about is the coupon rate is stated at 8% yet as it has been explained to me the interest rate is actually different each 3, 5, 7 and 10 years is different.I appreciate any time you might be able to give me.Kind regards
Youssef Jed (1 year ago)
Thank you soo much! Very helpful!
John (1 year ago)
I really enjoyed this lesson knowing nothing about bonds and once reading in an investment book that bonds were a type of loan, I always assumed they had to be carried to maturity or redeemed for their par value only. I never knew they could be bought and sold on the open market this is nothing short of a revelation to me as dumb as it sounds. What I am struggling to understand is who would in their right mind would buy a bond yielding the rates today or even previous lows such as 2.2% on the 30 year. Such a yield would barely keep pace with inflation and you would lose your shirt once interest rates went up.
Bryleefy (1 year ago)
Hey preston! I still cant quote grasp the ytm topic. Why is coupon 2 payment 26? And so on.. Moreover, why should we use compund interest to calculate ytm? Sorry but i lost it at the reinvesting part. I got confused. It would be great help if you reply to ths. thanks
Elizabeth Jack (1 year ago)
Where I can buy a coupon from what Bank
Archana Ravi (1 year ago)
Love your videos. So simple and easy to understand. Thanks!!
Royce Davis (1 year ago)
As always these lectures are great however I have one important criticism. I think you are being very misleading with your compounding example where you assume the investor can reinvest each coupon in another security paying 4%. Because in your example he gets coupon 1 (25 bucks), invests it in a 4% baring security and then in 6 months when he gets his next coupon his previous coupon has already earned a dollar (4%). But its only been 6 months since he invested that 25 dollars, not a year. So in your example you are really assuming that he is investing his coupons in a 8% annual investment that pays 4% every 6 months. Just something that jumped out at me and I wanted to express. Thanks again for all your hard work, great teaching!
Ian E. Millais (1 year ago)
Hi Preston, A USD50 coupon, paid twice a year at USD25/payment and capitalized compound interest @5% over 30 payments gives you 1072.57 and not 1,098 as suggested in your lesson. Therefore, the yield is quite different in all your examples. You may want to check the calculator at the Buffetbooks site. If you find me wrong, please show me the full calculation of what you did to get to the 1,098. My calculation is - i=2.5, n=30, PV=-25, PMT=25 resolve for FV. The time value is set to end because it is a bond coupon. Kind regards
Cuong Ngo (1 year ago)
Preston, great video. Besides, YTM does not have anything to do with compounded interest concept (re-investing coupon payment into an alternate security). YTM can be calculated from Face value, Current Bond Price, Payment Frequency, Annual Coupon Interest (Coupon Yield), and years till maturity. None of these factors has anything to do with re-investing strategy. I think YTM helps correct the Current Yield number due to deviation between Par Value and Current Bond Price. Let me know if I'm wrong though. Again, great video as always.
Nouf Alosaimi (2 years ago)
Thank you so much
Eike Börgens (2 years ago)
Hello I have got one question, isn't there a need that the bond value calculation takes into account that if we would have invested the $200 other wise we would have got a interest on it? As i see it this is not happening?! Cheers and thanks for the really good videos :-)
ApprenticeshipUSA.com (2 years ago)
EXCELLENT video. Preston you do a great job with explaining a complicated topic.Thank you!
Jack Maaa (2 years ago)
You are a lifesaver, Thank you :)
Jayesh Bhargava (2 years ago)
Great Video! Helped understand the concept better.
Michael Trier-hofby (2 years ago)
An easy YTM calculator: http://www.investopedia.com/calculator/aoytm.aspx
Selektur (2 years ago)
you're shite
Shmitt Reuben (2 years ago)
Jesse needs to shorten his tie.
Stephen White (1 year ago)
Jesse's different, he does what he wants, and he doesn't give a fxck. just look at him
Kiwi (2 years ago)
haha I'm now distracted after realising thta
James Cannon (2 years ago)
Why does the YTM have to be included in compounded interest? It doesnt have any terms in the formula that account for that? Isn't compounded interest a separate concept from YTM?
Michael Trier-hofby (2 years ago)
But yeah i see your point it has nothing to do with compound interest per say.. It is a separate formula as i explained above.
Michael Trier-hofby (2 years ago)
It is in the YTM equation because the coupon payments yield that he puts is 1098$ if the remaining years left on the bond is 15 years.. The 1098$ is the coupon yield WITH compound interest in year 15 as you can see in the table he used for coupon yields with 5% interest yearly. If you do not want compound interest to be included you can just put the number from year 15 shown in the simple interest table instead of the 1098$ it would then be 750$ at 30 coupon payments (15 years). So you can choose if you want to do the YTM calculation with simple interest or compound interest on the coupon yields.
James Keynes (2 years ago)
Bravo! Finally someone who is able to teach. I immediately understood your explanations. If only there were more good teachers around, finance would be easier to grasp. Keep up the good work!
Dan Cacovean (2 years ago)
cool explanations!!!
Jason Willis (2 years ago)
This is a great video and it answers a lot of my questions regarding bonds and value. My remaining question is how the coupon payment is reinvested at the same rate. How is the first payment of only $25 reinvested into another security that offers 5%? I don't know of any investment opportunity like that. I am sure my head is in the wrong place so any advice would be greatly appreciated.
RIPxBlackHawk (9 days ago)
It's not about 5%. Your investment could return at 1% or 2000%. What's important is that you keep investing it in endeavors that are return high and are of relatively low risk.
Michael Trier-hofby (2 years ago)
It is just a calculation that shows you, that if you used the 25$ coupon payment as a re-investment into for example another bond (that gave you 5% per year), instead of taking it out of your investment account and spending it on lollipops or whatever.. As he said, it is not a calculation that is going to be 100% accurate because you never know what your investment will give you of annually return but as i said, if it is money that is in your investment account and you are keeping it there for investing you can put a basis % return that you at least expect to get on your alternative investments.. The fact is that if it is an investment account, the coupon yields wouldn´t just be standing dead and doing nothing since you would actively be investing with your funds in the account. That is the thought behind it..
Max Waldburg (2 years ago)
Why would someone ever pay €1200 for a bond when the face value is €1000? I mean I could see why someone might sell a bond for less than they paid if they needed the money before the bond was to mature... I suppose someone might pay above the face value if interest rates from banks was reduced... is this the answer? Nice video otherwise. Thanks
Raver Magik (2 years ago)
They would pay for it if the Coupon rate is high enough with enough time still left to make it worth it. What if the coupon was 10 percent with 25 years remaining? If you can make that 200 back with a higher coupon then its worth it. Although if you can find that coupon on a bond with an 800 price for a 1k bond your better off. It just depends on what is available in the market and your end goal.
Maverick Fabela (2 years ago)
how does he reinvest the coupon
Kyle H (5 months ago)
Buy other investment instruments like stock or bonds
Michael Trier-hofby (2 years ago)
Well you get the money for the coupon twice annually so that is how .. In another bond for example that also has an annual rate of 5%
kwang hui han (2 years ago)
how do you calculate the yield to maturity for compounded interest @ 12:00?
Tarun Kakumanu (2 years ago)
How do you calculate yield to maturity if you can't reinvest/compound the coupon payment?
Michael Trier-hofby (2 years ago)
You use the simple interest coupon yields instead of the compound interest yields.. So for this example the coupon payments at coupon 30 (15 years) would be 750$ instead of 1098$ as you can see in the simple interest table he showed..
andi deng (2 years ago)
+Tarun Kakumanu i believe that's simply the same as “current yield”
San Fran (2 years ago)
Ok but how you come up with YTM rate? 3.3% and 5%, 7.2%? Thanks
Underwear Baker (3 months ago)
+andi deng where you got 1.025 ?
supertrooper621 (2 years ago)
+andi deng but can you show the calculation for how you get 3.3% ? not just show the first coupon...second coupon... Appreciate that in advance.
San Fran (2 years ago)
+andi deng thanks bro, really appreciate that
andi deng (2 years ago)
+Sami H 25(first coupon) 25x1.025(first coupon+ the coupon of the coupon, or you know, interest)+25 (second coupon)=50.625 (total) 50.625x1.025 (total of first 2coupons + interest) +25 (3rd coupon)=76.8 76.8 x1.025 +25=103.8 the math matches the table at min 7:00. except the video maker rounded it. So you will end up with 1098$ after doing this for 30 times (because you compound twice a year.) that's the money u will make, but hence u paid extra 200 or 200 less, reverse the steps subtracting 200 or adding, and you will get something like 16.5 or 36 for one coupon. u 2x the number to get one year coupon rate. divided it by 1000 and gets u the yeild % sorry if im not explaining it clearly, 1:30am kinda sleepy. Let me know if i'm wrong
GG (2 years ago)
"Q-pons" Thanks for the lesson, but for the love of Buddha, stop saying it like that.
Eugene Talabon (2 years ago)
+Nima You can actually say "Q-pon". You have the option to. Since, coupon's pronunciation is /ˈk(y)o͞oˌpän/. It's not a mistake to pronounce it as "Q-pon".
Larry Hora (2 years ago)
Love that jazz background man! You just created the perfect aura, the perfect marriage between music and math. All professors should implement your method, go ahead make those big bucks! write a book on the subject.
matthew pehanich (2 years ago)
I understand there is a formula for solving yield to maturity but since it is a percentage where is that number coming from. If the YTM is 3.3% what is the 3.3% out of.For example 250 is 25% of 1000. So for yield to maturity (blank) is 3.3% of (blank). could you fill in the blanks for me Preston.
Nehuen Ramirez (2 months ago)
The 3,3% is relative to the final cash he is getting when the bond matures, it’s $1000 so the 3,3% means after the 15 years, if everything has gone right, you would have had an average of 0,0033 x $1000 = $33 every year. That’s not what he is getting for real every year, because he is getting always the same $25 coupons but when you invest, you don’t look at the micro, you go macro... so you wanna know what your final return was after the 15 years, and it is bond itself after 15 years (1000) + the compounding interests of the 15 years on the $25 coupons ($1660~) / the price he paid ($1200) = 2660/1200 = 2,21 * 100 (for percentage) = 221% >>> you made a 121% profit in 15 years (because you substract the first 100% you had of your investment before actually investing it) Sorry if my calc are wrong but these are the numbers that came up fast
Michael Trier-hofby (2 years ago)
YTM is the annual internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled. Read more: Yield To Maturity (YTM) Definition | Investopedia http://www.investopedia.com/terms/y/yieldtomaturity.asp#ixzz4Obw5iEq0 Follow us: Investopedia on Facebook
andi deng (2 years ago)
+Acnotin Forever 25(first coupon) 25x1.025(first coupon+ the coupon of the coupon, or you know, interest)+25 (second coupon)=50.625 (total) 50.625x1.025 (total of first 2coupons + interest) +25 (3rd coupon)=76.8 76.8 x1.025 +25=103.8 the math matches the table at min 7:00. except the video maker rounded it. So you will end up with 1098$ after doing this for 30 times (because you compound twice a year.) that's the money u will make, but hence u paid extra 200 or 200 less, reverse the steps subtracting 200 or adding, and you will get something like 16.5 or 36 for one coupon. u 2x the number to get one year coupon rate. divided it by 1000 and gets u the yeild % sorry if im not explaining it clearly, 1:30am kinda sleepy. Let me know if i'm wrong
Acnotin Forever (2 years ago)
+matthew pehanich I also don't get it
Emmanuel Mofunanya (3 years ago)
Hi what is the formular for calculating the yield to Maturity. Thank you
Evariste H. (1 year ago)
So what is the role of knowing that the Yield To Maturity is 3.3%, 5%, or 7.2%?? What will it help Jesse in his calculations?
JAMES WANJOHI (1 year ago)
Derek Godette (2 years ago)
I have the same question so I am going to investigate. The problem is these guys will show an audience how to do something by one formula, then when another scenario such as a coupon bond from a Zero coupon bond comes a long, they will calculate it without showing how they did it- and this will only take them a couple seconds-before moving on to another example. And that messes ones reasoning up completely. Why not show how you got that answer then move on. So you audience will follow and learn.
Michael Trier-hofby (2 years ago)
http://www.investopedia.com/calculator/aoytm.aspx - can be calulated here easily and fast
James Jiang (2 years ago)
+andi deng i dont get it. 1098-200 = 898 as the video showed. then 898/30 = 30 for one coupon. then 30*2 = 60 is the one year coupon rate, divided it by 1000 you get yield + 6% . where does the 3.3% come from ?
Robert Brandhofer (3 years ago)
Thanks preston... really, really good and so easy to understand!
Bryan Liu (3 years ago)
best video on bonds it allllll makes sense now thxxxxxxxx
A T Wills (3 years ago)
How do you calculate compound interest on the bond.?
JAMES WANJOHI (1 year ago)
Kevin Suriel (3 years ago)
Why is the coupon payment so high in 12:50 like why are they 1098 and so on like aren't coupon payment on a semi annual basis
harsimranjit17 (3 years ago)
Thank you very much for sharing this valuable knowledge with us.
Beatrice Amondi (3 years ago)
thanks alot!
Ole Christian Henne (3 years ago)
Are bonds same as stocks?!?!!
ACgaming TheHobo (3 years ago)
+Ole Christian Henne No they are not, hence they require different formulas to compute the valuation of a stock and the valuation of a bond.
edithegodfather (3 years ago)
but wait, if the cfo guy who initially wanted 500 mil $ issues 500.000 bonds worth 1000$ each with a 5% coupon rate, that means he'll be paying 25 mil $/year for 30 years and at the end of the 30 years he'll pay the initial 500 mil $, doesn't that mean that in the end he'll be paying 1,25 bil $? (which is kind of a bull shit deal)
RIPxBlackHawk (9 days ago)
Yeah but that's how much they'd value their HQ building. The company buys their revenue of 30 years into the future. A company building a HQ building for 500 million dollars already has a revenue beyond 500 million and possibly already is valued multiple billion dollars. So in the grand scheme of things if they really wanted to they could pay of the entire loan plus interest the next day. Though it proves much more profitable to pay little of more than more of little. Never the less companies generally enjoy and want low interest rates so they can get the same money for less. Though again someone asking for 500 million usually already has 500 million but wants to utilise the money else where.
Rene Lauzurique (9 months ago)
Literally the same concept as a mortage. Except a Mortage typically has one owner, or one debtor.
Tarun Kakumanu (2 years ago)
+edithegodfather hopefuly in the 30 years, you can turn a 500 million dollar company into multiple billions. you are taking the investors money and turning it in billions. you have got nothing to lose as long as you keep the company up.
Carol Deliz (3 years ago)
Thank You, Great instruction
Preston Pysh (3 years ago)
+Carol Deliz thank you so much!
onfire4000 (3 years ago)
Question: If the YTM assumes we reinvested the coupon payments, why is the YTM rate equal to the coupon rate when face value equals current price? This because the return on the bond would be bigger in the reinvesting case, therefore the rate that equals the future valor to the present value wouldnt be higher? Or i other terms wouldnt the rate that equals the present value to the future value be higher?
Tony Rivera (3 years ago)
Let no one tell you otherwise, you know how to lecture and make it very easy to understanding this important subject. Thank you, Preston Pysh.
shoaib khan (2 months ago)
Jesse , I the guy from ATHLEAN X Omg .
Sahil Setia (1 year ago)
Preston Pysh true
Preston Pysh (3 years ago)
+Tony Rivera thanks so much Tony!
Jesse Carey (3 years ago)
My names jesse :)
orestesdd (3 years ago)
Another questions: what is the best financial calculator to buy?  Or should I used a software on my computer or an app on my iPhone?  BTW, can the financial calculators be used to do more things than just finding YTM of a bond?  Thanks.
Jared Morris (3 years ago)
+orestesdd Try a TI BA II Plus. If you're doing any type of financial class or certification this is mainly what they use... super helpful and simple to learn.
orestesdd (3 years ago)
Sorry to ask this question here, but I just went to check on MCO which as a P/E = 22.99, but its P/B = -58.52; thus, what does it mean to have this negative P/B ratio?  The asking price now is 109.32, and I know Mr. Buffett likes to invest on MCO.  If I were to multiply its (P/E) by (P/B) ratios, I would certainly get a result less than 22.5 which is positive whereas the result from multiplying these two ratios will be a negative number.  So anyone cares to explain?  Thanks a lot.
Lily Francis (3 years ago)
+orestesdd PB is their assets after they paid all their liabilities. So having it negative is that they are in debt and can't pay back?
Kean Hall (3 years ago)
Um...I'm no maths wizzo...quite the contrary. Am just trying hard to get my head around this stuff. But it seems to me that your calculation on compounding of reinvested coupons is wrong..? (7.54 time marker). The coupons are 6 month coupons, no? So coupon 1 has only  been reinvested for 6 months when we get coupon 2. So the 5% earning on coupon 1 should be divided by 2 thus: ($25 x 5%)/2=$0.62. Or to put it another way, the chart shows coupons reinvested at a 10% return (not 5%). I'll put my hand down now and promise to be quiet for the rest of the lesson....
CheeseWiZ (3 years ago)
+Kean Hall ANNUAL coupon rate...like Peter is saying.
Peter Portskeler (3 years ago)
+Kean Hall I actually have to think for a bit. But you see when you give your equation, your're using the 6 months coupon payment, which is $25. However, you're using the interest for the whole year, 2 times coupon payments, which is 5%. Try to use 2.5% and if it's not right, I don't know:)
Nancy Batch (3 years ago)
Perhaps the narrator misspoke, but if the bond is purchased at the end of year 5, then $1,098 of the total $3,400 in compound interest would have already been received leaving $2,302 to still be paid over the remaining 20 years not $1,098 (see 9:04)
Nancy Batch (3 years ago)
+sharloff For some reason that point did not come across in the video but it does makes logical sense, thanks!
CheeseWiZ (3 years ago)
+Nancy Batch Right. Because, the previous compounded interest belongs to the previous owner -- not the new owner. So, if I sold you a 30-year bond with only 15 years remaining, it's like you're buying a 15-year bond and can only expect to collect 15 years worth of interest.
Nancy Batch (3 years ago)
+sharloff So what you are saying is that for the purposes of this calculation the compounding restarts when the bond changes hands?
CheeseWiZ (3 years ago)
+Nancy Batch It IS TO BE received. I think you're still stuck on thinking that the compounded interest from the previous owner means the compounded interest will be greater for the new investor later. If the old investor received $1,098 over the first 15 years, and then sold the bond to a new investor who decided to reinvest his payments the same way, the second investor would still only receive $1,098 over the last 15 years, because the new investor starts from the first year (at the 15th year on the bond) on the 30 year chart. The purpose is to value the bond. You cannot account for 30 years of compounded interest when you only have 15 years left on the bond. The new owner would only collect 15 years of compounded interest.
Nancy Batch (3 years ago)
+sharloff Thank you for your response but I am afraid it does not address the question I asked. In the video the example shows that $1,098 is the amount ALREADY received by the borrower in year 5, but Preston states that this is the amount TO BE received over the next 15 years. He says this at both 9:04 and at 10:20 but I think he just misspoke and meant to say $2,302 is the amount still to be received over the next 15 years.
Nick Park (3 years ago)
YTM only happens when you reinvest your coupons correct? thank you so much
Jeffrey Ogden (3 years ago)
So Yield to Maturity is an equation that defines my return on investment over the lifetime of the bond assuming I hold onto it until maturity? I am trying to understand if it takes inflation or taxes into account.  So an 800 dollar investment to get a return on compound interest of 50 dollars every year for 15 years (roughly 1132.87 dollars) + the 200 I paid under face value for a 1000 dollar bond. That is a 1332.87 dollar return on my 800 dollar investment or 167% return over 15 years = 11.13% But if I convert the 1332.87 dollars to the present value based on a 4% inflation it comes to be more like 740.1427 present value. Then subtract 28% of taxes (207.239) on my earnings it becomes 532.90 dollars. The actual return on investment then becomes 4.4 (6.2% if you don't include taxes) (7% if you don't include taxes and assume 3% inflation).  So in conclusion, I am assuming yield to maturity does not take taxes into account and assumes roughly a 3% tax inflation rather than a conservative 4%. Can anyone confirm this for me?
Jared Morris (3 years ago)
+Jeffrey Ogden Hey, Although you posted this 4 months ago... (it may not be relevant whatsoever to you anymore). Yield to maturity is an expected (or theoretical) yield you would get... but there are certain assumptions you MUST make for YTM to be useful. (1) You hold the bond from the day you buy it to the day it matures; (2) you receive all interest payments (company doesn't go bankrupt); and (3) you can reinvest ALL interest payments at the same YTM as when you bought the bond (NOT PRACTICAL). YTM is usually an "ex-ante" calculation (before the fact)... the actual return you get is your REALIZED YIELD (an ex-post calculation). A basic YTM calculation DOES NOT take inflation nor taxes into account!! Your calculation is missing a few things that we must take into account now: ASSUMING you purchased the bond today (t=0) at a PV = $800, FV = $1000, Semiannual interest payment = $25, a 15 year time frame (Or N=30 [15 x 2])... you are saying that the market presently has an Interest rate of 7.203% (which is 3.6015% * 2). NOW, what is the Future value in 15 years of all the interest rate payments? N=30, I/Y = 3.6015%, PV = 0, PMT = 25, FV =? The FV of all interest payments is $1312.34 NOW, what will the future value of the bond itself be in 15 years? Well, it will be the Face value of the bond (par), = $1,000. NOW /////////////// We will look at REALIZED YIELD which is MORE important than YTM to the investor. a basic return formula is [END-BEG]/BEG X 100. [(1312.34+1000)-800]/800 X 100 = 189% gain. A SIMPLE arithmetic return per year would be 189% / 15 = 12.6% per year. If you wanted to subtract inflation from this return you could. This all assumes you hold this investment in a tax-free/deferred account. Hope this helps, you were mostly spot on! Cheers
Buen Rumbo (3 years ago)
Hello preston could you do a practical exercise for bonds like you did for stocks?Thanks!
Very informative and helps learning. Ihankyou very much.
Preston Pysh (3 years ago)
+Ravikhumar Ramakrishnan thanks for watching.
ABHIDEEP KUMAR (3 years ago)
this is great lecture. But , i think you round up decimal numbers upto 1 digit. like 4.16666666667 = 4.2. and it affects the value of bond.
Preston Pysh (3 years ago)
+ABHIDEEP KUMAR good catch, I'm not good at math.
Simon Renfors (3 years ago)
Great videos! But how was the compunding of the 5 % on the coupons calculated? can't figure it out
Crapguy (3 months ago)
Thats because 5% is per annum and bond has coupan every six months (5/2)
Underwear Baker (3 months ago)
+hunter2 why is it 1.025
hunter2 (10 months ago)
Well it's actually 1.025 to the power of two times the number of years you have had the bond minus the price (if you do it your way you get $3322 instead of $3400).
JBr 2406 (10 months ago)
Price multiplied by 1.05 to the power of number of years you have had the bond and then minus the price
hunter2 (10 months ago)
1000*(1+0.05/2)^60 - 1000 = 3400
Vera Budennaya (4 years ago)
This course is so useful and easy to understand! Thank you, Vera
Vera Budennaya (4 years ago)
Hi Preston,  I am watching your lessons a few times and this gives  me invaluable knowledge and understanding how actually a stock market works. Thank you, Vera
Preston Pysh (4 years ago)
+Вера Долгушина thanks for watching Vera!
Charles Hays (4 years ago)
What if Jesse does not reinvest his coupon payment? How does that affect YTM?
Charles Hays (4 years ago)
So the ytm does not reflect a compounding interest value? Im taking a bus 310 course online and having a very rough go of it. The math is simple but the terminology is difficult to grasp.
Preston Pysh (4 years ago)
+Charles Hays it will be less.  I don't have a calculator on my website for that, but there are ones on the web for finding that yield.
Beetoo221 (4 years ago)
awesome videos man!
Preston Pysh (4 years ago)
+Beetoo221 thanks for watching!
Chris Kim (4 years ago)
Hi Preston Pysh just one question can you please tell me how you do this calculation ? coupon payment: $1,098 par gain/loss: $200 difference: $1,298 Yield to maturity: 7.2% I can not figure out how you get this 7.2% rate.  How does the coupon payment change the yield to maturity rate/value ? please explain 
onfire4000 (3 years ago)
+Preston Pysh It doesn't for me, as it only teaches us to compute those value wit a calculator.
Preston Pysh (4 years ago)
+Chris Kim watch video 16 and see I that helps answer your question
Irakli Imnaishvili (4 years ago)
Very useful Yield to Maturity free online calculator http://www.investopedia.com/calculator/aoytm.aspx
Econ Dude (4 years ago)
Thanks for this vid. Finally get it
Preston Pysh (4 years ago)
+Jonh Green thanks for watching!
Kartik D'souza (4 years ago)
the ytm formula at the end is flawed 
Paul Wood (4 years ago)
So far I think that you are the best. teacher of this stock stuff that I have found on the Web. Others come close, many others are good....but this is great Its very clean,professional and indept
Aryän Dz (4 years ago)
How are the coupons were compounded to get 1098$?
Joe (3 years ago)
+Aryän Dz use this formula: F=A*((1+r/n)^(n*t)-1)/(r/n); A=25, r=.05, n=2, t=15 should come out to $1097.57
Razvan Stanciu (4 years ago)
+John Lucas You saved me! Thanks!
John Lucas (4 years ago)
I believe Preston mean Jesse invested in a financial product earning 4% not 5% return in half-year. which gives u 25*(1+4%)=26 in 6 months, when next coupon comes  25+26=51. Thats my best guess. 
superAweber (4 years ago)
7.2% yield. That looks nice. Do those opportunities actually occur in bonds (in the real world)? Basically buying a bond at 2% below the par value?  This video made me realize how valuable it is to always pay less for any security. That alone gives you higher returns... because it's always E/P=returns, so the less you pay - P - the better your return. 
Preston Pysh (5 years ago)
Thanks for the comment Sanjib. Long Term Bonds are definitely a risky place to be right now (2013).
Sanjib Swain (5 years ago)
Buffett Says "But many investors have also been drawn to bonds because their prices rise as rates fall, and Buffett said they could get their comeuppance when that process reverses. "Bonds, they're terrible investments now," Buffett said. "That will change at some point, and when it changes, people could lose a lot of money if they're in long-term bonds." Same thing you have said in one of your videos..
Preston Pysh (5 years ago)
Tonyz92, thanks for subscribing. Yes, 2008/2009 was a very fun time to be an investor. Don't worry, they'll be more opportunities like that in the future.
Preston Pysh (5 years ago)
Thanks for watching Patricia!
Patricia Delrio (5 years ago)
Pio Villacorta (5 years ago)
Thanks Preston!
Preston Pysh (5 years ago)
Tom, most of the mentoring I do occurs at the buffettsbooks forum. I'm on there almost every day. I try to comment on every post made on the forum. My first recommendation would be to read everything you can get your hands on. I'm obviously biased, but I also recommend watching all of my videos in order. Definitely start from the beginning because it compounds as it goes. The way you loose money in the market is failing to identify risk. I strongly discourage mutual funds and promote ETFs.
Pio Villacorta (5 years ago)
Preston, I haven't made my first investment on stocks or bonds yet. I need to learn a lot first before taking my first step. I was wondering if you mentor people like me who aspires to become an investor. I am from the UK by the way. Also, any advice on what step should I make? Should I get into mutual funds as my first step?

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