Yield to Maturity (YTM)
Quick Definition
The total annualized return an investor earns if a bond is held until maturity, accounting for coupon payments, purchase price, and par value at redemption.
Key Takeaways
- The total annualized return if held to maturity — the bond's IRR
- Accounts for coupon, price, par value, and time to maturity
- Assumes reinvestment of coupons at the same YTM rate
- At par: YTM = coupon; at discount: YTM > coupon; at premium: YTM < coupon
What Is Yield to Maturity (YTM)?
Yield to maturity (YTM) is the most comprehensive measure of a bond's expected return, representing the internal rate of return (IRR) earned by an investor who buys the bond at its current market price and holds it until maturity, collecting all coupon payments and the par value at redemption. YTM accounts for the bond's coupon rate, time to maturity, current market price, and the difference between purchase price and par value. It assumes all coupon payments are reinvested at the same YTM rate — an assumption that may not hold in practice. YTM is the standard metric for comparing bonds with different coupons, maturities, and prices. When a bond trades at par, YTM equals the coupon rate; at a discount, YTM exceeds the coupon; at a premium, YTM is below the coupon.
Yield to Maturity (YTM) Example
- 1A bond with a 4% coupon trading at $950 with 5 years to maturity has a YTM of approximately 5.1%, reflecting the coupon plus the $50 capital gain at par
- 2Two bonds — one with a 3% coupon at $920 and another with a 6% coupon at $1,080 — might have nearly identical YTMs despite very different prices and coupons
Related Terms
Current Yield
A bond's annual coupon payment divided by its current market price, providing a simple snapshot of income return.
Coupon Rate
The annual interest rate stated on a bond, expressed as a percentage of face value, that determines the periodic coupon payments.
Nominal Yield
The stated interest rate on a bond, expressed as a percentage of par value, without adjusting for inflation or market price changes.
Bond Equivalent Yield (BEY)
A calculation that converts a bond's yield to an annualized semiannual basis, allowing comparison between bonds with different payment frequencies.
Bond
A fixed-income debt security where investors loan money to an issuer in exchange for regular interest payments and return of principal at maturity.
Treasury Bond (T-Bond)
A long-term U.S. government debt security with a maturity of 20 or 30 years, paying semiannual coupon interest.
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