Simple definition
Yield to maturity, or YTM, is the total yearly return you'd earn on a bond if you bought it today and held it until it matures, collecting every interest payment along the way. It blends the interest with any gain or loss between your price and the bond's face value. Think of it as the bond's all-in rate, not just its coupon.
Why it matters
Yield to maturity is the fairest single number for comparing bonds, because it captures both the interest and the difference between price and face value. A bond bought below face value has a YTM above its coupon; one bought above has a lower YTM. It helps you see a bond's true return, not just its sticker interest.
Real-life example
Imagine a bond with a $1,000 face value and a 5% coupon that you buy for $950. Because you paid less than face value and will collect $1,000 at maturity, your yield to maturity is a bit above 5%. These are rounded, made-up numbers to show the idea, not a real quote.
Common mistakes
- Confusing yield to maturity with the coupon rate, which ignores the price you paid.
- Assuming you'll actually earn the YTM if you sell before the bond matures.
- Overlooking that YTM assumes you reinvest each interest payment, which may not happen.
- Treating a high YTM as pure reward without checking the issuer's default risk.
Pro tips
- Use yield to maturity to compare bonds trading at different prices on equal footing.
- Pair YTM with the bond's credit rating so you weigh return against risk.
- Remember YTM assumes you hold to maturity and reinvest the interest.
- Check whether a quoted yield is the coupon, the current yield, or the YTM.
Related Money Dictionary terms
- BondA loan you make to a government or company that pays you interest and returns your money on a set date.
- Coupon RateThe fixed annual interest a bond pays, shown as a percentage of its face value.
- YieldThe income an investment pays you each year, shown as a percentage of its current price.
- Maturity DateThe date a certificate of deposit or other fixed-term product ends, when you can withdraw your money and earned interest without penalty.
- Face ValueThe amount a bond issuer promises to repay when the bond matures, also called par value.
- Current YieldA bond's annual interest payment divided by its current market price, showing income relative to today's cost.
Frequently asked questions
How is yield to maturity different from the coupon rate?
The coupon rate is the fixed interest a bond pays on its face value and never changes. Yield to maturity factors in the price you actually paid and the face value you'll collect at maturity. Buy below face value and your YTM tops the coupon; buy above and it's lower. YTM is the fuller measure of return.
Why isn't yield to maturity a simple formula I can eyeball?
YTM is the single rate that makes all of a bond's future payments equal its current price, which requires solving for that rate rather than plugging into a clean equation. Calculators and spreadsheets handle it. Conceptually, it's the return that ties together your purchase price, the interest, and the face value repaid at maturity.
Will I really earn the yield to maturity?
Only if you hold the bond to maturity and reinvest each interest payment at the same rate — assumptions that don't always hold. If you sell early, your actual return depends on the price then. And if the issuer defaults, you may earn far less. YTM is a useful estimate under specific conditions, not a guarantee.
Knowing what Yield to Maturity means is knowledge — the first half. A brick gets placed when you act on it: find the yield to maturity on a bond you're considering and compare it to its plain coupon rate.
Sources & references
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Plain-English education — not personalized legal, tax, or investment advice.