YTM calculation -- mechanics

[sridhar]

I refer to your examples in Mkt Risk Study Notes: page 112/192 -- where you have two YTM examples.

In both cases, when I did: CPT i/Y I was getting 4.22% and 2.88% instead of half that amount.

I am using TI BA II Plus Professional. I screwed around for a bit and then found:

[2nd] P/Y = 2 and now instead turned into 1.

Now, everything corresponds to your results. Isn't P/Y the same as payments per year? At some point recently I had set the P/Y to 2 (not sure why) and then I/Y came out doubled.


David, what's your advice: Leave P/Y to 1 and then for N use the total no. of (coupon) periods?

--sridhar

 

[David Harper CFA FRM]

Yes P/Y = payments per year. And, absolutely, (for me) the only way to go is:

Let N = number of compound periods and let P/Y = 1

Then the entire solution is worked PER THE COMPOUND PERIOD; e.g., the I/Y is interest rate for the period. This way, the calculator's "Year (Y)" is really our period however we define it.

I would get confused otherwise. I realize the "cost" of this is we have to make manual adjustments (e.g., in your example, we have to convert to bond-equivalent by multiplying by two because our period is six months) but I think the chances for error are much smaller than if we let the calculator convert periods for us.

I think i say in the screencast episode that the first step in these bond pricing problems (after asking, what am i solving for?) is: establish the periodicity; i.e., how do i define one period, is it six months (probably), one year, or maybe one month.

Then to the calculator the 'Y' isn't a year, it's whatever period. So, this way, the only care we need is to (i) make sure the inputs are going in with the right period (is my interest rate six months? one year? one month) and (ii) at the end, make sure we've converted to our answer (do i need to convert six months to bond-equivalent annual)

David