Glossary · UK
What is Yield to Maturity?
The total annualised return an investor can expect from a bond if they hold it until it matures and reinvest all coupon payments, taking into account its current price, coupon rate and time to maturity.
Full Definition
Yield to maturity (YTM) is the total annualised return an investor would earn from holding a bond from purchase until it matures and is repaid at face value, assuming all coupon (interest) payments received along the way are reinvested at the same rate, making it a more complete measure of a bond's likely return than the coupon rate alone. Because bonds trade on a secondary market at prices that move up and down with changes in prevailing interest rates and perceived credit risk, a bond's current market price is very often different from its original face value, so its running yield (the coupon divided by the current price) alone does not capture the gain or loss an investor will realise if they buy at a price above or below face value and hold to maturity -- yield to maturity captures both the coupon income and this price-to-par convergence in a single figure. As a general rule, a bond trading below its face value (at a discount) will have a yield to maturity higher than its coupon rate, since the investor also benefits from the capital gain as the price rises back toward face value at maturity, while a bond trading above face value (at a premium) will have a yield to maturity below its coupon rate, for the opposite reason. Yield to maturity assumes the bond is held to maturity and that the issuer does not default, so it is best understood as a theoretical benchmark for comparing bonds of different maturities, coupons and prices on a like-for-like basis, rather than a guarantee of the actual return an investor will realise, particularly if they might need to sell before maturity at a currently unknown future price.