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A Note on Yield-to-Maturity Approximations

Author

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  • Reynolds Griffith

    (College of Business, North Texas State University, Denton, Texas 76203)

  • P. R. Chandy

    (College of Business, North Texas State University, Denton, Texas 76203)

Abstract

There are several types of yields in the bond market vernacular: nominal yield, current yield, yield to maturity, yield to call, and realized yield. Of these, yield to maturity is the most important and widely used valuation model. Several approximate yield-to-maturity formulas are compared with the formula found in most finance and investment textbooks to determine whether it provides us with a reasonably good approximation of the precise yield to maturity. We find that the traditional formula is the least accurate of the ones tested and compared (traditional, Henderson, Standard and Poors, modified Standard and Poors, Todhunter, and modified Todhunter). The Henderson or the modified Todhunter formulas provide significantly better results (depending on the maturity of the bond). Perhaps, the traditional textbook formula should be replaced.

Suggested Citation

  • Reynolds Griffith & P. R. Chandy, 1986. "A Note on Yield-to-Maturity Approximations," Interfaces, INFORMS, vol. 16(3), pages 90-97, June.
    • Handle: RePEc:inm:orinte:v:16:y:1986:i:3:p:90-97
    DOI: 10.1287/inte.16.3.90
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    Keywords

    finance: investment;

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