Glossary/Fixed income

Yield to Maturity

Also known as YTM, Redemption yield, Book yield

Yield to maturity, or YTM, is the single discount rate that equates a bond’s current price with the present value of its promised coupons and principal through maturity. It is an internal rate of return based on contractual cash flows and stated compounding conventions.

Editorially reviewed 2026-07-29

Why yield to maturity matters

YTM combines coupon income, price discount or premium, and time to maturity into one annualized measure, making bonds with different prices and coupons easier to compare. It is more complete than current yield. Yet it is not a guaranteed return: the calculation assumes promised payments occur, the bond is held to maturity, and interim coupons can be reinvested consistently.

How it is applied

Solve iteratively for the rate that discounts every scheduled coupon and maturity principal to the observed full price. Market conventions specify payment frequency, day count, settlement, and compounding. For callable debt, calculate yield to call and yield to worst as well. Credit analysts compare YTM with government or swap yields, then examine whether spread compensates for default, recovery, liquidity, options, taxes, and transaction cost.

Formula

Price = Σ [Coupont / (1 + YTM)^t] + Principal / (1 + YTM)^n
Price
Current bond price under the selected accrued-interest convention
Coupont
Promised coupon at time t
Principal
Promised maturity payment
YTM
Periodic discount rate adjusted to the quoted annual convention

Portfolio example

A $1,000 face-value bond pays a 4% coupon and trades at $920 with five years remaining. Its YTM exceeds 4% because an investor receives coupon income plus an $80 pull to par if payments occur and the bond matures at $1,000. If the issuer defaults, calls the bond, or coupons are reinvested at lower rates, realized return will differ from quoted YTM.

How to interpret it

A premium bond generally has YTM below its coupon rate, while a discount bond generally has YTM above it. Higher YTM can mean better prospective compensation or greater credit, liquidity, and option risk. Comparisons need consistent compounding, currency, maturity, and tax basis. For a portfolio, the weighted average YTM is not itself a guaranteed portfolio return because holdings trade, cash flows arrive at different times, and defaults may occur.

Limitations and common misconceptions

YTM assumes contractual cash flows and does not incorporate default probability or recovery. Its reinvestment assumption may be unrealistic, particularly for high-coupon bonds. A single rate discounts all maturities despite a curved term structure. Calls, puts, conversions, floating coupons, and prepayments require alternative measures. Accrued interest and conventions affect quotes. Scenario-based total return and option-adjusted analysis provide a fuller forward-looking assessment.

Sources and further reading

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