Summary
Yield to Maturity, or YTM, represents the estimated annual return an investor may earn if a bond is bought at its current price and held until maturity. It includes coupon income and any gain or loss from the difference between purchase price and redemption value.
YTM is one of the most important bond return measures.
Why it matters
YTM helps investors compare bonds with different coupons, prices, and maturities. It provides a more complete return estimate than coupon rate alone.
Investors often use YTM to compare opportunities across the bond market.
How to Calculate
YTM = ((Annual Coupon Payment + ((Face Value – Current Price) / Years to Maturity)) / ((Face Value + Current Price) / 2)) × 100
How to read it
A higher YTM generally means higher potential return, but it may also indicate higher risk. This risk may relate to credit quality, liquidity, maturity, or market conditions.
A lower YTM may indicate lower perceived risk or stronger demand for the bond.
Things to keep in mind
YTM assumes the bond is held until maturity and that payments are received as expected. It does not eliminate credit risk or liquidity risk.
Investors should review YTM together with issuer strength, maturity, duration, and trading activity.