Enter the annual dividend rate, market price, and time remaining until redemption into the calculator to determine the yield to maturity for a preferred stock.

Preferred Stock YTM Calculator

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Preferred Stock YTM Formula

The following equation is used to calculate the Preferred Stock YTM.

YTM = [ D + (F - P) / n ] / [ (F + P) / 2 ]
  • Where YTM is the yield to maturity (%)
  • D is the annual dividend ($)
  • P is the current market price ($)
  • F is the face (or redemption) value ($)
  • n is the number of years until redemption

To calculate the yield to maturity of a preferred stock, sum the annual dividend and the portion of the face value gained over time (the difference between face value and current price, divided by the number of years). Then, divide by the average of the face value and current price to determine the annualized yield if held until redemption.

What is a Preferred Stock YTM?

Definition:

Preferred Stock Yield to Maturity (YTM) is the annualized return investors can expect when they hold a preferred stock until its maturity or redemption date. It factors in the fixed dividend payments, the purchase price, and the face value redeemed at maturity or at the call date.

How to Calculate Preferred Stock YTM?

Example Problem:

The following example outlines the steps and information needed to calculate the Preferred Stock YTM.

First, determine the face value of the stock. In this example, the face value is $100.

Next, determine the annual dividend. The preferred stock pays a $5 dividend per year.

Now, find the current market price. Assume it’s trading at $90.

Determine the time until the stock is redeemed or matures. Assume 5 years remain.

Finally, calculate the YTM using the formula above:

YTM = [ 5 + (100 – 90) / 5 ] / [ (100 + 90) / 2 ]

YTM = [ 5 + 2 ] / [ 190 / 2 ]

YTM = 7 / 95 = 0.07368 = 7.368%

FAQ

What factors can affect the yield to maturity of a preferred stock?

The yield to maturity can be influenced by changes in interest rates, the creditworthiness of the issuing company, the time remaining until redemption, and any call features. Market supply and demand, along with overall economic conditions, also play significant roles in determining current preferred stock prices.

How do changes in interest rates affect Preferred Stock YTM?

When interest rates rise, the market price of existing preferred stocks generally falls to offer a more competitive yield, thereby increasing the YTM for new investors. Conversely, when interest rates fall, existing preferred stocks may trade at a premium, resulting in a lower YTM.

Are all preferred stocks subject to redemption or call features?

Not all preferred stocks carry call or redemption features. Some are perpetual, meaning they have no fixed maturity date. Investors should review the specific terms of the preferred shares to determine whether a redemption or call date applies and how that might affect the yield.