what is yield to maturity
Yield to maturity (YTM) is the annualized rate of return you’re expected to earn on a bond if you buy it at today’s market price and hold it all the way until it matures, assuming all coupon (interest) payments are made on time and reinvested at the same rate.
What “yield to maturity” really means
Think of YTM as the bond’s “internal rate of return” (IRR):
- It uses:
- Current market price
- Face (par) value
- Coupon rate and payment schedule
- Time left to maturity
- It answers: “If I pay today’s price and keep this bond to the end, what annual return will I earn overall?”
YTM includes both the coupon income and any gain or loss from buying at a discount or premium (below or above face value).
Key assumptions behind YTM
YTM is powerful but rests on some strong assumptions:
- You hold the bond to maturity (no selling early).
- The issuer never defaults and pays all coupons and principal exactly as promised.
- You can reinvest every coupon at a rate equal to the YTM itself.
If any of these fail (for example, rates fall and you reinvest coupons at a lower rate), your realized return will differ from the stated YTM.
How YTM compares to other bond yields
| Measure | What it captures | Key assumption |
|---|---|---|
| Current yield | Annual coupon / current price (ignores price gain/loss to maturity). | Looks only at this year’s income. |
| Yield to maturity | Total annualized return, including coupons and price move back to par. | Hold to maturity, reinvest coupons at same rate. |
| Yield to call | Annualized return if bond is redeemed early at a call date/price. | Issuer calls the bond at the first call date. | [5][1]
Formula idea (no heavy math)
In concept, YTM is the discount rate rrr that makes the present value of all future cash flows equal the bond’s current price :
- Those cash flows are all coupon payments plus the face value at maturity.
Because this equation is non‑linear, YTM is usually found with a financial calculator, spreadsheet function (like IRR/YIELD), or a dedicated online calculator, not by hand.
Why investors care (quick scoop)
- It lets you compare bonds with different coupons, prices, and maturities on an apples‑to‑apples annual return basis.
- A higher YTM generally means higher expected return but usually also higher risk (credit risk, interest‑rate risk, or both).
- For mutual funds and bond portfolios, the portfolio YTM gives a quick sense of the expected long‑run return from the underlying bonds, under the same standard assumptions.
TL;DR: Yield to maturity is the bond world’s all‑in annual return number, assuming you hold to the end, don’t get defaulted on, and can reinvest coupons at that same yield.
Information gathered from public forums or data available on the internet and portrayed here.