Yield to Maturity Explainer
Yield to maturity, or YTM, is the discount rate that makes the present value of a bond’s scheduled coupon and principal payments equal its current price. It summarizes price, cash flows, and time remaining as an annualized rate under a specific set of assumptions.
A bond bought below face value usually has a YTM above its coupon rate because the investor also expects a gain if principal is repaid at maturity. A premium bond usually has a YTM below its coupon rate. Price and yield move in opposite directions for a conventional fixed-rate bond.
The calculation assumes scheduled payments arrive in full and that coupons can be reinvested at the computed yield. Those conditions may not occur. Default, restructuring, transaction costs, taxes, inflation, and changing reinvestment rates can make realized return materially different.
Callable bonds may be redeemed before maturity, so yield to call or yield to worst can be more relevant. Compare securities using consistent compounding, day-count, settlement, and tax conventions. YTM is a useful standardized estimate, not a promised investment outcome.
YTM is the rate that links today’s price with scheduled coupons and principal.
It incorporates both income and any discount or premium to face value.
Full payment and coupon reinvestment at the same rate are built into the calculation.
Actual results can differ when conditions change.
Calls, puts, and conversions can end or transform the bond before maturity.
Review yield to call and yield to worst where relevant.
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