how to calculate yield maintenance
the formula for calculating a yield maintenance premium is ym pv of rp on the mortgage ir ty where ym yield maintenance pv present value rp remaining payments ir interest rate ty treasury yield the present value factor in the formula can be calculated as 1 1 r n 12 r where r treasury yield n number of months begin aligned textbf ym textbf pv of rp on the mortgage times textbf ir textbf ty textbf where text ym text yield maintenance text pv text present value text rp text remaining payments text ir text interest rate text ty text treasury yield text the present value factor in the formula can be calculated as frac 1 1 r frac n 12 r textbf where r text treasury yield n text number of months end aligned ym pv of rp on the mortgage ir ty where ym yield maintenancepv present valuerp remaining paymentsir interest ratety treasury yieldthe present value factor in the formula can be calculated as r1 1 r 12n where r treasury yieldn number of months for example assume a borrower has a 60 000 balance remaining on a loan with 5 interest the remaining term of the loan is exactly five years or 60 months if the borrower decides to pay off the loan when the yield on 5 year treasury notes drops to 3 the yield maintenance can be calculated in this way step 1 pv 1 1 03 60 12 0 03 x 60 000pv 4 58 x 60 000pv 274 782 43step 2 yield maintenance 274 782 43 x 0 05 0 03 yield maintenance 274 782 43 x 0 05 0 03 yield maintenance 5 495 65the borrower will have to pay an additional 5 495 65 to prepay his debt if treasury yields go up from where they were when a loan was taken out the lender can make a profit by accepting the early loan repayment amount and lending the money out at a higher rate or investing the money in higher paying treasury bonds in this case there is no yield loss to the lender but it will still charge a prepayment penalty on the principal balance 