What Is Yield to Maturity (YTM)?
Yield to maturity is the yearly return on a bond if you buy it at today's price and hold it until it matures, with every payment made on time. How it differs from the coupon and current yield, with a worked example.
In one sentence
Yield to maturity. The yearly return you'd earn by buying a bond at today's price and holding it to maturity, assuming every payment is made.
How it works
A bond's coupon is fixed when it's issued, but its price changes afterward. Yield to maturity combines everything you'd receive if you bought today and held to the end: the coupons, plus the gain or loss as the price moves to face value at maturity. It's the single interest rate that makes all those future payments worth today's price.
| Face value | $1,000 |
|---|---|
| Coupon | 5%, or $50 a year |
| Price today | $950 |
| Current yield: $50 ÷ $950 | 5.26% |
| Yield to maturity | About 6.19% |
The yield to maturity is higher than the current yield because the bond also gains $50 as it moves from $950 to $1,000. Bought above face value, the opposite happens and YTM is lower than the coupon.
What it assumes
YTM assumes you hold to maturity, every payment arrives on time, and coupons can be reinvested at the same rate. If the issuer defaults, or you sell early after rates rise, your actual return will differ. For riskier bonds, a high YTM is partly payment for the chance of default.
Learn it properly
- Yield MeasuresFixed Income in Depth (depth track) · Free
- Why Bond Prices and Yields Move in Opposite DirectionsPart 2: What You Can Own · Free