Yield to maturity

The single discount rate at which the present value of a bond's remaining cash flows equals its current price. It has no closed-form solution for a multi-period bond and is found numerically.

Example

A 5% coupon bond with seven years remaining, priced at 945 per 1,000 of par, has a yield to maturity of 5.9847% - against a current yield of 5.2910%.

Important

It assumes every coupon is reinvested at the yield to maturity itself until the bond matures. Nobody guarantees that, so a holder who spends the coupons realises less than the quoted figure even if the issuer pays in full.

Related terms

  • Current yield — The annual coupon divided by the current price. It measures the income received against what the bond costs today, and nothing else.
  • Reinvestment risk — The risk that coupons, or the proceeds of a maturing bond, must be put back to work at a lower rate than the one they came from - which is what makes a quoted yield to maturity conditional rather than certain.
  • Present value — What an amount of money arriving in the future is worth today, once discounted at a chosen rate.
  • Discount rate — The annual rate at which future money is reduced to a present value, reflecting both the time you wait and the risk that the money does not arrive.

Lessons that explain it

  • The schedule, and the part of the return nobody prints on it — A bond's cash flows are written down in advance. What those cash flows finally compound to is not, and that gap is where the quoted yield quietly makes an assumption on your behalf. (11 min)
  • Rates up, price down: the mechanism, and exactly how far — A bond's price is not an opinion. Given a yield, it is the present value of a schedule - and the size of the move when yields shift is a number you can compute in advance. (14 min)
  • Appraising one bond: three yields that disagree, and what the rating leaves out — A single bond has a coupon rate, a current yield and a yield to maturity, and they are three different numbers. The gap between the last of them and a government bond is the market's own estimate of what could go wrong. (13 min)

All 578 terms in the Investing glossary