Yield to MaturityYTM
Yield to maturity is the annual return you would earn by buying a bond at today’s price and holding it to maturity, assuming every payment is made and coupons are reinvested at the same rate. It is the standard way to compare bonds.
A bond’s coupon tells you how much interest it pays, but not what return you get — that depends on the price you pay. Yield to maturity combines the coupon, the price and the time left into one annual figure, which makes bonds with different coupons and maturities comparable. It is also why bond prices fall when market yields rise. This entry explains coupon, current yield and yield to maturity, with simple examples.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Bond yield, Redemption yield, Coupon rate vs yield
- Updated
Yield to maturity in plain words
A bond is a loan: you lend money to the issuer, which pays interest and returns the principal at maturity.1 The coupon is the interest it promises and when it is paid.2
Buy the bond below its face value and you earn the coupons plus the gain to face value; buy above it and you lose some of that premium by maturity. Yield to maturity rolls all of this into one annual rate. A simpler figure, the current yield, just divides the coupon by the price you pay.3
How to think about yield to maturity, step by step
Coupon rate
Annual coupon ÷ face value — fixed when the bond is issued.
Current yield
Annual coupon ÷ current price.
Yield to maturity
The single rate that makes all future payments worth today’s price.
Compare with price
Below face value → YTM above the coupon; above face value → YTM below the coupon.
Remember the assumptions
Held to maturity, all payments made, coupons reinvested at the same rate.
Link to market rates
When market rates rise, prices of existing fixed-rate bonds generally fall, and vice versa.4 See Interest Rate.
Worked examples
Example 1 — Coupon vs. current yield
DiscountA bond with $1,000 face value pays a $40 coupon each year. It trades at $950.
| Coupon rate | $40 ÷ $1,000 = 4.0% |
| Current yield | $40 ÷ $950 ≈ 4.2% |
Buying below face value raises the yield above the coupon rate.
Example 2 — Approximate yield to maturity
YTMThe same bond matures in 5 years. Approximate YTM = (coupon + (face − price) ÷ years) ÷ ((face + price) ÷ 2).
| Annual gain to face | $50 ÷ 5 = $10 |
| Approx. YTM | ($40 + $10) ÷ $975 ≈ 5.1% |
YTM adds the pull towards face value to the coupon. (The exact figure is found by solving for the discount rate.)
Example 3 — Rates rise, price falls
Rate riskMarket yields for similar bonds rise from 4% to 5%. A 4% coupon bond must now compete with new 5% bonds.
| Existing bond’s price | Falls below face value |
The price adjusts until the old bond’s yield matches the market. See Treasury Bills, Notes and Bonds.
Three bond yield measures
| Aspect | Formula | Shows |
|---|---|---|
| Coupon rate | Coupon ÷ face value | What the bond promises to pay |
| Current yield | Coupon ÷ price | Income relative to today’s price |
| Yield to maturity | Rate equating payments to price | Total annual return if held to maturity |
| Real yield | Yield minus expected inflation | Return after inflation. See Real Yield |
How yield to maturity is used
Comparing bonds
Different coupons and maturities on one scale.
Reading the market
Benchmark yields signal rate expectations. See Federal Reserve.
Credit risk
Riskier issuers must offer higher yields. See Credit Spread.
Equity valuation
Bond yields are compared with earnings and dividend yields. See Dividend Yield.
Advantages and disadvantages
Advantages
- One comparable figure for any fixed-rate bond.
- Captures price, coupon and time together.
- Standard in bond markets.
Disadvantages
- Assumes holding to maturity and no default.
- Assumes coupons are reinvested at the same rate.
- Ignores taxes and call features.
Going deeper
Read as far as you need. Each level builds on the one before it.
Price and yield move opposite
Beginner
A lower price means a higher yield for the same payments, and a higher price means a lower yield.
Duration
Intermediate
Longer bonds react more strongly to changes in yield, because more of their payments are far in the future. See Duration.
Yield to worst
Advanced
For bonds that the issuer can repay early, investors look at the lowest possible yield across call dates as well as to maturity. See Yield to Worst.
Common mistakes
Confusing coupon and yield
Yield depends on the price you pay.
Ignoring default risk
High yields often reflect higher risk.
Forgetting interest-rate risk
Prices fall if market yields rise.
Assuming YTM is guaranteed
Only if held to maturity without default.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Coupon rate, current yield and YTM are different measures.
- YTM is the total annual return if held to maturity.
- Bonds bought below face value yield more than their coupon.
- Bond prices and yields move in opposite directions.
- YTM assumes no default and reinvestment at the same rate.
Frequently asked questions
Is yield to maturity the same as the interest rate?
Why do bond prices fall when yields rise?
Can yield to maturity be negative?
Further learning
- Treasury Bills, Notes and Bonds
The benchmark bonds for yields.
- Interest Rate
What moves yields.
- Inflation
Why real yields matter.
- Recession
How yields behave in downturns.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Bonds (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Coupon (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Yield (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.