How to compare bonds

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To compare different fixed-income securities, you'll need to calculate the ‘yield to maturity’. This brings together the purchase price of the bond and the coupon rate, and reflects the true underlying interest rate of return for the investor. Bonds are sometimes quoted and traded on a yield to maturity basis, from which the purchase price can then be calculated. For bonds that trade on the ASX, they are quoted and trade on a price basis, and the yield to maturity can be back calculated.

There are two formulas used to calculate the yield to maturity. The first gives you an approximate figure, while the second gives the exact yield. However, the second formula requires you to guess the yield, 'r', and work it into the formula by trial and error (although some financial calculators can do the calculation.)

Formula 1: