Yield to maturity (YTM)

Definition

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It is expressed as an annual percentage rate and takes into account the bond's current market price, par value, coupon interest rate, and time to maturity.

5 Must Know Facts For Your Next Test

1. YTM assumes that all coupon payments are reinvested at the same rate as the bond's current yield.
2. It provides a way to compare bonds with different coupon rates and maturities.
3. YTM can be affected by changes in interest rates; when interest rates rise, YTM typically falls, and vice versa.
4. Calculating YTM involves solving for the discount rate that equates the present value of all future cash flows from the bond to its current market price.
5. The YTM is often used by investors to gauge whether a bond is a good investment compared to other bonds or financial instruments.

Review Questions

• What factors does YTM take into consideration when calculating the total return of a bond?
• How does a change in market interest rates affect Yield to Maturity?
• Why might investors use YTM as a metric for comparing different bonds?

Related terms

Coupon Rate: The annual interest rate paid by the bond issuer relative to its face value.

Current Yield: A measure of a bond's annual coupon payment divided by its current market price.

Par Value: The face value of a bond, or the amount that will be paid back to the investor at maturity.