Yield to Maturity
Yield to maturity (YTM) is the total annual return an investor earns on a bond if it is bought at today's price and held until it matures, assuming every coupon is reinvested at that same rate. It is the single discount rate that makes the present value of all the bond's future coupon and principal payments equal its current market price, so it captures coupon income plus any gain or loss to par.
Worked example
A bond with a $1,000 face value and a 5% coupon ($50 a year) is bought for $960 with one year left to maturity. At maturity the holder receives the $50 coupon plus $1,000 principal. YTM ≈ ($50 + ($1,000 − $960)) ÷ $960 = $90 ÷ $960 = 9.4%.
Why it matters
Yield to maturity lets investors compare bonds with different prices, coupons and maturities on a single annualized basis, which the coupon rate alone cannot do. Its key assumption — and its pitfall — is that every coupon is reinvested at the YTM itself; if reinvestment rates turn out lower, the realized return falls short. YTM also assumes the bond is held to maturity and the issuer does not default.
Frequently asked questions
What is the difference between yield to maturity and coupon rate?
The coupon rate is the fixed annual interest paid on the bond's face value. Yield to maturity is the total return based on the bond's current price, so it also reflects any discount or premium to par.
Why is YTM higher than the coupon when a bond trades below par?
Buying below face value means you collect the full principal at maturity, adding a capital gain on top of the coupons. That extra gain raises the overall yield above the stated coupon rate.
Related terms: Cost of Debt, Risk-Free Rate