Yield to Maturity (YTM)
Definition
The total return earned on a bond if held to maturity, assuming coupons are reinvested at the same rate.
How It Works
YTM is the discount rate that equates the bond price to the PV of its coupon stream and face value. Found by trial and error or financial calculator.
Example
A bond priced at $950 with 6% coupons and 5 years to maturity has YTM ≈ 7.1%.
Common Misconceptions
- ✗YTM equals the coupon rate
- ✗YTM guarantees that return (reinvestment risk exists)
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Common questions about Yield to Maturity (YTM)
Current yield = annual coupon / price. YTM also accounts for capital gains or losses at maturity.
Yes. YTM assumes all coupon payments are reinvested at the YTM rate until maturity. If actual reinvestment rates differ, the realized return will not equal the original YTM, which is known as reinvestment risk.