yield to maturity
The total expected return on a bond if held to its maturity date, accounting for current price, par value, coupon payments, and time to maturity.
Example
“A bond purchased at a discount with a 5% coupon may have a yield to maturity of 6% if held to its redemption date.”
Memory Tip
YTM = what you EARN if you hold the bond ALL THE WAY to maturity.
Why It Matters
Yield to maturity helps investors compare different bonds on an equal basis by showing the actual annual return they can expect if they hold the bond until it matures. This is crucial for making informed investment decisions and ensuring your bond portfolio meets your financial goals and required rate of return.
Common Misconception
Many people mistakenly believe that yield to maturity is the same as the coupon rate, but they are different. The coupon rate is fixed and only represents the annual interest payment, while yield to maturity factors in whether you bought the bond at a discount or premium and accounts for the total return including capital gains or losses.
In Practice
Suppose you buy a bond with a 5 percent coupon rate and a par value of 1000 dollars, but you purchase it for 950 dollars with 10 years until maturity. The yield to maturity would be higher than 5 percent because you will receive the par value of 1000 dollars at maturity, creating a capital gain along with your annual coupon payments. A financial calculator would show the YTM is approximately 5.38 percent annually.
Etymology
YIELD (return) TO (until) MATURITY (end date). The total return you get by holding to the end.
Common Misspellings
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