YIELD TO MATURITY (YTM)
Back to GlossaryDefinition
Total expected return of a bond if held to maturity, accounting for price, coupon, and time.
Summary
Yield to Maturity (YTM) is the annualized rate of return an investor would earn if they purchased a bond at its current market price and held it until it matures. Think of it as the bond's 'true' interest rate that accounts for all cash flows: the periodic coupon payments you'll receive and any gain or loss from buying the bond above or below its face value. YTM assumes all coupon payments are reinvested at the same rate and that the bond is held to maturity without default.
Usage Context
Essential for bond valuation, portfolio management decisions, comparing fixed-income investments, and understanding the relationship between bond prices and interest rates in financial markets.
Common Confusions
- Confusing YTM with the coupon rate - YTM considers market price while coupon rate is fixed
- Thinking YTM is guaranteed - it assumes reinvestment at the same rate and no default
- Believing higher YTM always means better investment without considering risk
- Not understanding that YTM changes as market conditions and bond prices change
- Assuming YTM applies if you sell the bond early
