Yield to Maturity

What Is Yield to Maturity?

Yield to maturity is the annualized return an investor would earn if a bond were bought at its current market price and held until maturity, assuming scheduled payments are made. It is one of the most important bond-yield measures because it tries to capture the full economics of a bond, not just the coupon payment. In fixed income, bonds often trade above or below face value, and that price difference changes the real return an investor can expect by maturity.

Key Takeaways

• Yield to maturity combines coupon income with the gain or loss from buying a bond above or below par.
• It assumes the bond is held until maturity and the issuer makes the scheduled payments.
• YTM is broader than current yield, which looks only at annual coupon income relative to price.
• A bond bought at a discount can have a YTM above its coupon rate.
• A bond bought at a premium can have a YTM below its coupon rate.

How Yield to Maturity Works

YTM reflects three moving pieces at once: the coupon payments the bond is expected to make, the market price paid today, and the fact that the bond is redeemed at face value at maturity. If the bond trades below face value, the investor may earn an additional capital gain by maturity as the bond pulls back toward par. If the bond trades above face value, part of the return is effectively offset by that premium declining away over time.

YTM gives a fuller picture than a simple coupon rate. It tries to express the bond's return as one annualized rate that incorporates both income and price convergence.

Yield to Maturity Versus Current Yield

Current Yield divides a bond's annual coupon income by its market price. Yield to maturity goes further by also reflecting what happens between today's price and the bond's redemption at par. That makes YTM the more complete measure when an investor is actually evaluating return through maturity rather than just comparing cash income today.

How YTM Changes Bond Comparison

YTM helps investors compare bonds with different prices, coupons, and maturities on a more consistent basis. A lower-coupon bond purchased at a discount may have a more attractive YTM than a higher-coupon bond purchased at a steep premium. Without YTM, investors can overfocus on headline coupon rates and miss the actual return dynamics.

Example of Discount-to-Par Return

Suppose a bond pays a fixed coupon but is trading below face value because market rates have risen. The annual coupon income still matters, but the investor may also gain if the bond is held to maturity and is redeemed at par. Yield to maturity incorporates both pieces and expresses them as one annualized return estimate.

The Bottom Line

Yield to maturity is the annualized return a bond investor would expect if the bond were bought at the current market price and held until maturity. It captures both coupon income and the effect of buying the bond at a discount or premium instead of focusing only on the coupon rate.