Yield To Maturity (YTM)

Definition of 'Yield To Maturity (YTM)'


The rate of return anticipated on a bond if held until the end of its lifetime. YTM is considered a long-term bond yield expressed as an annual rate. The YTM calculation takes into account the bond’s current market price, par value, coupon interest rate and time to maturity. It is also assumed that all coupon payments are reinvested at the same rate as the bond’s current yield. YTM is a complex but accurate calculation of a bond’s return that helps investors compare bonds with different maturities and coupons.

Investopedia explains 'Yield To Maturity (YTM)'


Yield to maturity accounts for the present value of a bond’s future coupon payments. In other words, it factors in the time value of money, whereas a simple current yield calculation does not.

An approximate YTM can be found by using a bond yield table. However, because calculating a bond's YTM is complex and involves trial and error (guessing and checking), it is usually done by using a business or financial calculator or a computer program.

YTM is the interest rate an investor would earn by investing every coupon payment from the bond at a constant interest rate until the bond’s maturity date. The present value of all of these future cash flows equals the bond’s market price. The calculation can be presented as:



OR



Solving the equation by hand requires understanding the relationship between a bond’s price and its yield. The interest rate is equal to the coupon rate when the bond is priced at par. A bond priced above par (a premium bond) has a coupon rate higher than the interest rate, and a bond priced below par has a coupon rate lower than the interest rate. So if an investor was calculating YTM on a bond priced below par (a discount bond), he would solve the equation by plugging in various annual interest rates that were higher than the coupon rate until he found a bond price close to the price of the bond he was holding.


Filed Under:

Related Video for 'Yield To Maturity (YTM)'

comments powered by Disqus
Hot Definitions
  1. Oil Reserves

    An estimate of the amount of crude oil located in a particular economic region. Oil reserves must have the potential of being extracted under current technological constraints. For example, if oil pools are located at unattainable depths, they would not be considered part of the nation's reserves.
  2. Joint Venture - JV

    A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it.
  3. Aggregate Risk

    The exposure of a bank, financial institution, or any type of major investor to foreign exchange contracts - both spot and forward - from a single counterparty or client. Aggregate risk in forex may also be defined as the total exposure of an entity to changes or fluctuations in currency rates.
  4. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  5. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  6. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
Trading Center