Yield To Maturity (YTM)

AAA

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.

VIDEO

RELATED TERMS
  1. Par Value

    The face value of a bond. Par value for a share refers to the ...
  2. Term To Maturity

    The remaining life of a financial instrument. In bonds, it is ...
  3. Coupon Rate

    The yield paid by a fixed income security. A fixed income security's ...
  4. Yield To Call

    The yield of a bond or note if you were to buy and hold the security ...
  5. Yield To Worst - YTW

    The lowest potential yield that can be received on a bond without ...
  6. Modified Duration

    A formula that expresses the measurable change in the value of ...
Related Articles
  1. Bonds & Fixed Income

    What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and treasury notes.
  2. Bonds are issued by governments, municipalities and companies to provide needed capital to fund short- and long-term operations or specific projects.
    Bonds & Fixed Income

    Bonds: They're Not Just For Seniors

    In this article, we'll show you how investors at any stage of life can keep these fixed-income investments. Keep Reading.
  3. Bonds & Fixed Income

    Perpetual Bonds: An Overview

    A perpetual bond makes interest payments to the investor forever. This type of bond holds a certain appeal to both the issuer and buyer.
  4. Bonds & Fixed Income

    The Wonders Of Convertible Bonds

    Ever wondered what exactly a convertible bond does? Read the features of a convertible bond and learn how important the conversion factor is to you as an investor.
  5. Bonds & Fixed Income

    Know Your Cost Basis For Bonds

    Nobody likes taxes, but tax reporting is an inevitable and unavoidable part of investing. If you buy stock, determining your costs basis is a slightly frustrating but fairly straightforward exercise. ...
  6. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  7. Bonds & Fixed Income

    Risks To Consider Before Investing In Bonds

    Make sure you understand the risks associated with bonds before making an investment decision.
  8. Mutual Funds & ETFs

    Evaluating Bond Funds: Keeping It Simple

    Discover some of the key factors for determining a fund's risk-return profile.
  9. Insurance

    How To Create A Laddered CD Portfolio

    Laddered certificates of deposit offer safe capital and predictable cash flow, while bringing simplicity to your portfolio.
  10. Forex Education

    How To Compare Yields On Different Bonds

    Find out how to equalize and compare fixed-income investments with different yield conventions.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center