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Some bonds pay interest throughout the bond's life, while others pay interest when the bond matures. If you received the accumulated interests in one payment at maturity, you can use the YIELDMAT function to find the bond's yield. To do that you need to know the following six things. First is the settlement date, which is the date that you take possession of the investment. Next is the maturity date and that is the last day of the investment. In other words the day when the principle you've invested plus any interest or other monies due will be paid to you.
Then next is the issue date and this is the date that the security was first made available for sale. Then there's the rate, which is the discount rate of the investment, the rate at which your accumulate interest. Then there is the price and price is expressed in terms of price per $100 a face value of the bond and in this case, we've set the price to $100. Then finally, we have basis. Basis refers to the way that you count the number of days in a month and a year. We've chosen option zero which is the default option.
Option 0 says that every month has 30 days and that means that there are 360 days in a year. It is artificial, but it is the North American banking standard so we'll go with it here. So now to find the yield to maturity for this investment, you can click and cell C11, then type equal and name of the function which is yieldmat, left parentheses, and then we can start typing in the cell references for the function. So at first we have the settlement date that's in cell C3, comma.
Maturity date C4, comma. The issue date is in cell C5, comma. The interest rate is in C6, comma. The price per 100 is in C7, comma, and the basis is in C8. Now I can type a right parentheses having entered values or cell references in this case for all of the arguments, and press Tab. When I do, we see that the yield to maturity for this investment is 6.17%. The yield to maturity represents the total increase of the investments value expressed as an annual interest rate.
You can use that value to compare this investment with others you are considering.
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