What is Yield to Maturity (YTM)?
Yield to maturity (YTM) is the total annual return an investor earns if they purchase a bond at its current market price and hold it until it matures. It accounts for coupon payments received, principal repayment at maturity, and the difference between purchase price and face value.
Yield to maturity is the internal rate of return (IRR) that equates a bond's current price to the present value of all future cash flows; it represents the effective annual return assuming the bond is held until maturity.
- 1↓TodayInvestor buys bond at market price P
- 2↓Years 1–nReceive annual coupon payments C
- 3↓Year nReceive final coupon C + principal FV
- 4YTMDiscount rate equating P to all cash flows
Step-by-step worked examples
You buy a bond at $950 with $1000 face value, $50 annual coupon, 10 years to maturity. Approximate YTM?
Bond price = $950 < $1000 (discount, YTM > coupon rate) Coupon rate = $50/$1000 = 5% $950 = Σ[$50/(1+YTM)^t] + $1000/(1+YTM)^10 Approximate YTM ≈ 5.4%
Bond at $1100, FV=$1000, coupon=$80/year, 5 years. YTM?
Bond price = $1100 > $1000 (premium, YTM < coupon rate) Coupon rate = $80/$1000 = 8% $1100 = Σ[$80/(1+YTM)^t] + $1000/(1+YTM)^5 YTM ≈ 6.2%
Zero-coupon bond: buy at $500, FV=$1000, 20 years. YTM?
No annual coupons; only principal at maturity $500 = $1000/(1+YTM)^20 (1+YTM)^20 = 2 YTM = 2^(1/20) − 1 ≈ 3.5%
Flashcards
Quick quiz
Q1.YTM is…
Q2.Discount bond (price < face value) has…
Q3.Premium bond (price > face value) has…
Q4.YTM assumes…
The full card deck, worked steps and AI-tutor support for “What is Yield to Maturity (YTM)?” are in Notek — study by hand before your exam.
Common mistakes
Thinking YTM equals coupon rate. — Correct: YTM = coupon rate only when bond trades at par; otherwise they differ.
Ignoring reinvestment risk. — Correct: YTM assumes coupons reinvested at same YTM rate; real reinvestment rates may differ.
Assuming YTM never changes. — Correct: YTM changes daily as market interest rates and bond prices fluctuate.
Confusing YTM with current yield. — Correct: Current yield = coupon / current price; YTM includes all cash flows to maturity.
FAQ
What is yield to maturity?
Total annual return if you hold a bond from now until maturity, accounting for price and coupons.
How to calculate YTM?
Iteratively solve: bond price = PV of all coupons + PV of principal at market YTM.
Can YTM be negative?
In theory no; in practice, negative YTM occurs in some markets during crises (you lose money).
Why does YTM matter?
It shows the effective return if you buy a bond today at its market price and hold to maturity.