Understanding Yield to Maturity (YTM)
YTM is the total return you earn if you hold a bond to maturity. Here’s what it means and why it differs from the coupon.
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Yield to maturity (YTM) is the total annualised return you’d earn on a bond if you buy it at today’s price and hold it until it matures, receiving all coupons and the final principal. It’s the single best measure of a bond’s return.
YTM vs coupon rate
The coupon rate is fixed at issue, based on face value. But bonds trade at prices above or below face value, which changes your actual return:
- Bought below face value → YTM is higher than the coupon (you also gain on price at maturity).
- Bought above face value → YTM is lower than the coupon.
- Bought at face value → YTM ≈ coupon.
So YTM, not the coupon, tells you what you’ll really earn.
Why YTM matters
- It lets you compare bonds with different coupons, prices and maturities on a like-for-like basis — it’s the bond world’s version of a return metric.
- It reflects the inverse price-yield relationship: when bond prices rise, YTM falls, and vice versa.
- For a target maturity fund held to maturity, the YTM at purchase gives a good indication of likely returns.
The assumptions behind it
YTM assumes you hold to maturity and reinvest coupons at the same rate — rarely perfectly true in practice. Still, it’s the standard yardstick. Pair it with credit rating (duration) to judge risk alongside return. Education only, not a recommendation.
