Yield to Maturity (YTM)

YTM combines two sources of return: the coupon payments and the gain or loss between the price paid and the face value received at maturity.

Suppose a bond with a face value of 1,000 pays 50 a year and matures in three years. If you buy it for 950, you receive 50 a year plus a 50 gain at maturity, because you get back 1,000. YTM expresses this as a single annual rate, about 6.9% here. If you paid 1,050 instead, the 50 loss at maturity would reduce the YTM below the 5% coupon rate.

Technically, YTM is the discount rate that makes the present value of all the bond's future payments equal to its current price. It is usually calculated with a financial calculator or spreadsheet.

YTM is the standard way to compare bonds with different prices, coupons and maturities. It assumes the issuer does not default and that coupons can be reinvested at the same rate. In reality, reinvestment rates change, so the actual return can differ. Bond prices and yields move in opposite directions: when a bond's price falls, its yield rises.