What Is Yield to Maturity?

What Is Yield to Maturity?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Yield to Maturity (YTM) is a concept in finance that represents the total return an investor would receive if they held a bond or other fixed-income security until it matures. It takes into consideration both regular interest payments and the capital gain or loss that occurs when the face value of the security is paid back at maturity. As such, it gives a more comprehensive measure of the returns of fixed-income securities than simple yield calculations.

Related Questions

1. How is Yield to Maturity calculated?

Yield to Maturity is calculated by solving the equation that equates the present worth of a bond’s cash inflows (coupon payments and par value) to its current market price. This is usually done with the help of financial calculators or computer software, as the equation often involves complex iterative processes.

2. Is a higher Yield to Maturity better?

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Yes, a higher Yield to Maturity typically indicates a better investment return. However, investors must also consider other factors like the credit risk of the issuer, potential changes in interest rates, and their own investment timeframe to make sound investment decisions.

3. What is the difference between Yield to Maturity and Coupon Rate?

While YTM considers both the coupon payments and the capital gain/loss at maturity, the coupon rate only refers to the annual coupon payments as a percentage of the bond’s face value. Therefore, YTM provides a more comprehensive measure of the bond’s return.

4. What would cause Yield to Maturity to decrease?

Yield to Maturity decreases when the price of the bond increases, assuming that the bond’s cash flows remain constant. Because bond prices are inversely related to market interest rates, a decrease in market interest rates would cause bond prices to increase and YTM to decrease.

5. Can Yield to Maturity be negative?

Yes, Yield to Maturity can be negative in certain situations. For example, if an investor purchases a bond for a price that is higher than the bond’s cash inflows discounted at a rate equal to the coupon rate, the YTM would be negative.