Yield to Maturity (YTM) is the annualized return you receive if you buy a bond at its current price, receive all coupon payments, and hold it until maturity. It's the most comprehensive measure of a bond's return because it accounts for the current price, coupon rate, face value, and time to maturity in a single number.

The Formula

YTM is the discount rate that makes the present value of all future cash flows equal to the current bond price:

Bond Price = Σ [Coupon / (1 + YTM)^t] + Face Value / (1 + YTM)^n

Where:

  • Coupon = annual coupon payment
  • Face Value = par value (usually $1,000)
  • n = years to maturity
  • YTM = discount rate (what we solve for)

This equation requires numerical solving (trial-and-error or Newton-Raphson) because YTM appears in the denominator.

Worked Example

A 5-year bond with $1,000 face value, 5% coupon (paying $50 annually), trading at $950:

We need to find YTM such that:

950 = 50/(1+YTM)¹ + 50/(1+YTM)² + 50/(1+YTM)³ + 50/(1+YTM)⁴ + 1050/(1+YTM)⁵

Solving numerically: YTM ≈ 5.72%

The bond trades at a discount ($950 < $1,000), so its YTM (5.72%) exceeds its coupon rate (5%).

Key Concepts

Current Yield = Annual Coupon / Current Price. For the example: $50 / $950 = 5.26%. This is simpler but ignores capital gains/losses.

YTM vs Current Yield: YTM includes the impact of buying at a discount or premium. Discount bonds (price < face) have YTM > coupon. Premium bonds (price > face) have YTM < coupon.

Assumptions in YTM

YTM assumes:

  • You hold to maturity (no early sale)
  • Coupon payments are reinvested at the YTM rate (often unrealistic)
  • The issuer doesn't default
  • The bond is not called early (for callable bonds)

If any assumption breaks, actual return will differ from YTM.

When to Use YTM

Compare YTM across different bonds to identify which offers the best value. A higher YTM attracts buyers, but understand why — is it credit risk, longer duration, or just market conditions? Also use YTM to decide whether a bond is worth buying relative to other assets.

Tips

YTM is quoted as an annual percentage. For bonds that pay semi-annually, multiply the semi-annual rate by 2. Also, remember that rising interest rates push bond prices down (and YTM up), while falling rates push prices up. The longer the bond's maturity, the more sensitive it is to rate changes.

Use our Bond YTM Calculator to find yield to maturity instantly.