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Yield to Maturity (YTM)

Yield to Maturity (YTM) is the total expected return an investor can earn if they hold a bond until it matures. YTM takes into account the bond’s current price, coupon payments, and the difference between the purchase price and the face value of the bond at maturity. It is expressed as an annualized percentage and reflects the bond’s total return, including interest payments and any capital gains or losses if the bond was purchased at a price different from its face value.

Example

An investor buys a bond with a face value of $1,000 and a coupon rate of 5% for $950. The bond’s YTM accounts for the coupon payments and the capital gain when the bond matures at $1,000, resulting in an overall return higher than the 5% coupon rate.

Key points

• The total return an investor can expect if they hold a bond to maturity, expressed as an annual percentage.

• Includes both coupon payments and any capital gains or losses from purchasing the bond at a price different from its face value.

• Helps investors assess the overall profitability of a bond investment over time.

Quick Answers to Curious Questions

YTM accounts for both coupon payments and the difference between the bond’s purchase price and its face value, while current yield only considers the coupon relative to the current bond price.

YTM provides a comprehensive estimate of the bond’s total return if held until maturity, helping investors evaluate the long-term profitability of the investment.

YTM standardizes the comparison by factoring in all aspects of a bond’s return, making it easier to evaluate bonds with different coupon rates, maturities, and purchase prices.