What is 'Yield To Maturity (YTM)'
Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until the end of its lifetime. Yield to maturity is considered a longterm bond yield, but is expressed as an annual rate. In other words, it is the internal rate of return of an investment in a bond if the investor holds the bond until maturity and if all payments are made as scheduled.
BREAKING DOWN 'Yield To Maturity (YTM)'
Calculations of yield to maturity assume that all coupon payments are reinvested at the same rate as the bond’s current yield, and take into account the bond’s current market price, par value, coupon interest rate and term to maturity. YTM is a complex but accurate calculation of a bond’s return that can help investors compare bonds with different maturities and coupons.
Because of the complex means of determining yield to maturity, it is often difficult to calculate a precise YTM value. Instead, one can approximate YTM by using a bond yield table. Because of the price value of a basis point, yields decrease as a bond’s price increases, and vice versa. For this reason, yield to maturity may only be calculated through trialanderror, by using a business or financial calculator or by using other software, like Investopedia’s own Yield To Maturity Calculator.
Though yield to maturity represents an annualized rate of return on a bond, coupon payments are often made on a semiannual basis, so YTM is often calculated on a sixmonth basis as well.
Yield to maturity is also often known as “book yield” or “redemption yield.”
Yield to maturity is very similar to current yield, which divides annual cash inflows from holding a bond by the market price of that bond, to determine how much money one would make by buying a bond and holding it for one year. Yet, unlike current yield, YTM 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. As such, it is often considered a more thorough means of calculating the return from a bond.
Because yield to maturity is the interest rate an investor would earn by reinvesting 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 method for calculating YTM can then be represented with the following formula:
or
Solving the equation by hand requires an understanding of the relationship between a bond’s price and its yield, as well as of the different types of bond pricings. Bonds can be priced at a discount, at par and at a premium. When the bond is priced at par, the bond’s interest rate is equal to its coupon rate. A bond priced above par (called a premium bond) has a coupon rate higher than the interest rate, and a bond priced below par (called a discount bond) has a coupon rate lower than the interest rate. So if an investor were calculating YTM on a bond priced below par, he or she would solve the equation by plugging in various annual interest rates that were higher than the coupon rate until finding a bond price close to the price of the bond in question.
Example: Calculating Yield to Maturity Through TrialandError
Imagine that you currently hold a bond whose par value is $100. Also suppose that the bond is currently priced at $95.92, so it has a current yield of 5.21%, and also that the bond matures in 30 months and pays a semiannual coupon of 5%. To calculate YTM here, you would begin by determining what the cash flows are. Every six months you would receive a coupon payment of $2.50 (0.05 x 0.5 x $100). In total, you would receive five payments of $2.50, in addition to the future value of $100. Next, we incorporate this data into the formula, which would look like this:
Now we must solve for the interest rate "i," which is where things start to get difficult. Yet, we do not have to start simply guessing random numbers if we stop for a moment to consider the relationship between bond price and yield. As was mentioned above, when a bond is priced at a discount from par, its interest rate will be greater than the coupon rate. In this example, the par value of the bond is $100, but it is priced below the par value at $95.92, meaning that the bond is priced at a discount. As such, the annual interest rate we are seeking must necessarily be greater than the coupon rate of 5%.
With this information we can now calculate and test a number of bond prices by plugging various annual interest rates that are higher than 5% into the formula above. Using a few different interest rates above 5%, one would come up with the following bond prices:
Taking the interest rate up by one and two percentage points to 6% and 7% yields bond prices of $98 and $95, respectively. Because the bond price in our example is $95.92, the list indicates that the interest rate we are solving for is between 6% and 7%, which gives a price of $98. Having determined the range of rates within which our interest rate lies, we can take a closer look and make another table showing the prices that YTM calculations yield with a series of interest rates increasing in increments of 0.1% instead of 1.0%. Using interest rates with smaller increments, our calculated bond prices are as follows:
Here we see that the present value of our bond is equal to $95.92 when the interest rate is at 6.8%. Fortunately, 6.8% corresponds precisely to our bond price, so no further calculations are required. If at this point we found that using an interest rate of 6.8% in our calculations did not yield the exact bond price, we would have to continue our trials and test interest rates increasing in 0.01% increments. As such, it should be clear why most investors prefer to use special programs to narrow down the interest rates rather than calculating through trialanderror, as the calculations required to determine YTM can be quite lengthy and timeconsuming.
Uses of Yield to Maturity (YTM)
Yield to maturity can be quite useful for estimating whether or not buying a bond is a good investment. An investor will often determine a required yield, or the return on a bond that will make the bond worthwhile, which may vary from investor to investor. Once an investor has determined the YTM of a bond he or she is considering buying, the investor can compare the YTM with the required yield to determine if the bond is a good buy.
Yet, yield to maturity has other applications as well. Because YTM is expressed as an annual rate regardless of the bond’s term to maturity, it can be used to compare bonds that have different maturities and coupons since YTM expresses the value of different bonds on the same terms.
Variations of Yield to Maturity (YTM)
Yield to maturity has a few common variations that are important to know before doing research on the subject.
One such variation is Yield to call (YTC), which assumes that the bond will be “called” (repurchased by issuer before it reaches maturity) and thus has a shorter cash flow period.
Another variation is Yield to put (YTP). YTP is similar to YTC, except for the fact that the holder of a put bond can choose to sell back the bond with a fixed price and on a particular date.
A third variation on YTM is Yield to worst (YTW). YTW bonds can be called, put or exchanged, and YTW bonds generally have the lowest yields out of YTM and its variants.
Limitations of Yield to Maturity (YTM)
Like any calculation that attempts to determine whether or not an investment is a good idea, yield to maturity comes with a few important limitations that any investor seeking to use it would do well to consider.
One limitation of YTM is that YTM calculations usually do not account for taxes that an investor pays on the bond. In this case YTM is known as the “gross redemption yield.” YTM calculations also do not account for purchasing or selling costs.
Another important limitation of both YTM and current yield is that these calculations are meant as estimates and are not necessarily reliable. Actual returns depend on the price of the bond when it is sold, and bond prices are determined by the market and can fluctuate substantially. Though this limitation generally has a more noticeable effect on current yield, because it is for a period of only one year, these fluctuations can affect YTM significantly as well.
For more on yield to maturity, read Advanced Bond Concepts: Yield and Bond Price.

Bond Yield
The amount of return an investor will realize on a bond. Several ... 
Discount Bond
A bond that is issued for less than its par (or face) value, ... 
Bond
A debt investment in which an investor loans money to an entity ... 
Term To Maturity
The remaining life of a financial instrument. In bonds, it is ... 
Required Yield
The return a bond must offer in order to be a worthwhile investment. ... 
Premium Bond
1) A bond that is trading above its par value. A bond will trade ...

Bonds & Fixed Income
Bond Yields: Current Yield And YTM
A bond's current yield, also called "bond yield," is the interest it pays annually divided by the bond's price. A stock's current yield, also called "dividend yield," is the sum of its annual ... 
Bonds & Fixed Income
Advanced Bond Concepts: Yield and Bond Price
In the last section of this tutorial, we touched on the concept of required yield. In this section we'll explain what this means and take a closer look into how various yields are calculated. ... 
Retirement
Bond Basics: Yield, Price And Other Confusion
Investopedia Explains: Bond yield, Bond price, yield to maturity, the link between price and yield and bond price in the market. 
Professionals
Bond Yields
FINRA/NASAA Series 65: Section 8 Bond Yields. In this section yield to maturity, current yield, yield to call and real interest rate. 
Investing
Understanding the Different Types of Bond Yields
Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment. 
Professionals
Typical Yield Measures
CFA Level 1  Typical Yield Measures. Learn the various measures of yield on a bond. Includes yield to first call, first par call, put, refunding and yield to maturity. 
Bonds & Fixed Income
Simple Math for FixedCoupon Corporate Bonds
A guide to help to understand the simple math behind fixedcoupon corporate bonds. 
Bonds & Fixed Income
How To Evaluate Bond Performance
Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk. 
Bonds & Fixed Income
Comparing Yield To Maturity And The Coupon Rate
Investors base investing decisions and strategies on yield to maturity more so than coupon rates. 
Bonds & Fixed Income
Understanding Interest Rates, Inflation And Bonds
Get to know the relationships that determine a bond's price and its payout.

On what basis does the sustainable growth rate fluctuate?
Learn about the differences between the calculations for the yield to maturity and spot rate for determining the present ... Read Answer >> 
What is the relationship between current yield and yield to maturity (YTM)?
Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >> 
What is the difference between yield to maturity and the spot rate?
Find out how yield to maturity and spot rate calculations use different discount rates to determine the present market value ... Read Answer >> 
What does a negative bond yield mean?
Find out what it means when a bond has a negative yield and what circumstances must arise for the yield to be negative when ... Read Answer >> 
Can a bond have a negative yield?
The return a bond provides to an investor is measured by its yield, which is quoted as a percentage. Current yield is a commonly ... Read Answer >> 
What is the difference between yield to maturity and holding period return yield?
Learn about the differences between a bond's yield to maturity (YTM) and its holding period return, and why bondholders should ... Read Answer >>