Yield to Maturity (YTM)
What Is Yield to Maturity (YTM)?
Yield to maturity (YTM) is the total return an investor can expect to earn if a bond is held until its maturity date. It includes interest payments and any difference between the purchase price and the bond’s face value.
YTM assumes that all coupon payments are reinvested at the same rate.
Why It Matters
Yield to maturity provides investors with a comprehensive estimate of a bond’s long-term return. It helps investors compare bonds with different prices, coupon rates, and maturity dates.
Bond investors often use YTM to evaluate whether a bond is a good investment relative to other fixed-income securities.
How Yield to Maturity Works
YTM considers several factors:
- bond purchase price
- face value
- coupon interest payments
- time remaining until maturity
If a bond is purchased at a discount, the YTM will typically be higher than the coupon rate. If purchased at a premium, the YTM will usually be lower.
Example
An investor buys a bond with a face value of $1,000 for $950 that pays $50 annually in interest. Because the bond was purchased at a discount, the yield to maturity will be higher than the 5% coupon rate.
Yield to Maturity vs Current Yield
- Yield to maturity includes interest payments and price changes over time.
- Current yield measures only annual interest relative to the bond’s current market price.
FAQs About Yield to Maturity
Does YTM guarantee returns?
No. It is an estimate assuming the bond is held until maturity and interest payments are reinvested.
Do bond funds have YTM?
Bond funds often report an average yield that approximates YTM.
Can YTM change?
Yes. Changes in market interest rates can affect bond prices and yields.
Related Terms
