Yield to Maturity (YTM)
YTM is the total return anticipated on a bond if held until maturity, expressed as an annual rate. It equates the present value of all future cash flows to the current price.
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Definition
YTM is the total return anticipated on a bond if held until maturity, expressed as an annual rate. It equates the present value of all future cash flows to the current price.
Use case
Used in fixed income workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Yield to Maturity (YTM)
YTM assumes all coupon payments are reinvested at the YTM rate — a simplifying assumption that rarely holds. It includes both coupon income and capital gains/losses if purchased at a discount or premium. Current yield only considers coupon payments versus price, ignoring the amortization of discount/premium.
Example: A 5-year bond with $1,000 face value, 5% annual coupon ($50), purchased at $950. YTM solves: $950 = $50/(1+r) + $50/(1+r)² + $50/(1+r)³ + $50/(1+r)⁴ + $1050/(1+r)⁵. YTM ≈ 6.19%.