Yield to Maturity (YTM)
The total return anticipated on a bond if held until it matures, expressed as an annual percentage rate.
What is Yield to Maturity?
Yield to maturity (YTM) is the total return an investor expects to earn if a bond is purchased today and held until its maturity date, assuming all coupon payments are reinvested at the same yield. YTM accounts for the bond's current market price, coupon payments, face value, and time to maturity. When a bond trades at a discount to face value, YTM exceeds the coupon rate; when it trades at a premium, YTM is below the coupon rate. YTM is the standard metric for comparing bonds with different coupons, maturities, and prices, and is the rate used in bond pricing equations. It is calculated by solving for the internal rate of return (IRR) of all bond cash flows.
Example
A 10-year bond with a $1,000 face value and 5% annual coupon is trading at $920. An investor who buys it at $920 and holds to maturity receives: 10 years of $50 coupon payments plus the $1,000 face value repayment at maturity. Because they paid $920 but receive $1,000 back, YTM (approximately 5.98%) exceeds the 5% coupon rate, reflecting the discount at purchase.