Bond

What is yield to maturity?

Yield to maturity is the annualized rate making scheduled cash flows' present value equal the market price.

Definition

Yield to maturity is the annualized rate making scheduled cash flows' present value equal the market price.

Intuition

A lower purchase price generally implies a higher yield for the same coupons and face value.

Formula

Price = \sum_{t = 1}^{N} \frac{Coupon}{{(1 + \frac{YTM}{m})}^{t}} + \frac{Face}{{(1 + \frac{YTM}{m})}^{N}}

Bond price equals the present value of all coupons and principal discounted at the yield to maturity.

Example

Enter 1,000 face value, 950 market price, and a 5% coupon rate.
Set five years to maturity with semiannual coupons.
YTM is about 6.18%. Because price is below face value, this is a discount bond and YTM exceeds the coupon rate.

Common mistakes

Do not confuse YTM with coupon rate or a guaranteed realized return.