I know how to calculate the bond price but where does the number 1 come from in the formula ? Can someone explain please ie the number one in 1 + YTM
In: Economics
The YTM is a %, like for example a 8% increase per year. Since that’s an increase, that means the value will have increased from 100% to 108% in one year.
How do you obtain this “108%”? By doing 100%+YTM. Then, you have to remember that mathematically the % symbol literally mean “1/100”, so “100% = 100 x 1/100 = 1”, so “100%+YTM” is just another way to write “1+YTM”.
So here is your **1+**
Because YTM is how much it *increases* each period. You still have the original value (that’s the 1).
If I have $10and get 10% interest per period then at the end I have $10 + 10% x $10 = $10(1+10%) = $11. If I didn’t do (1+YTM) I’d just have $1…the *gain*, I’d be ignoring the original amount.
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