Yield to maturity is the total return you'll earn if you hold a corporate bond until it matures and the issuer pays you back

Yield to maturity (often called YTM) is a single number that tells you what percentage return you'll get per year if you buy a bond at its current price and hold it to the end. It accounts for three things: the interest payments you'll receive along the way, the price you paid for the bond, and the face value you'll get back when it matures. If a bond's YTM is 5%, that means your money will grow at roughly 5% per year until maturity — assuming the company doesn't default and you don't sell early.

YTM is different from the bond's coupon rate, which is just the interest payment printed on the bond. A bond might have a 4% coupon but a 5.5% YTM if you bought it at a discount. The YTM fills in the gap between what you paid and what you'll receive.

Key Takeaways

  • Yield to maturity combines the coupon payments, the price you paid, and the face value you'll receive into one annual return percentage.
  • A bond trading below face value has a YTM higher than its coupon rate; a bond trading above face value has a YTM lower than its coupon rate.
  • YTM assumes you hold the bond until maturity and that the company doesn't default — if either changes, your actual return will differ.
  • You can compare YTM across different bonds to see which one offers better value, but YTM alone doesn't tell you about credit risk or inflation.

How YTM accounts for the price you paid

When a bond trades for less than its face value (called a discount), the YTM is higher than the coupon rate because you're buying it cheaper. For example, a $1,000 bond with a 4% coupon ($40 per year) might trade for $950. You'll still get $40 a year, but you also gain $50 when the bond matures and you're paid the full $1,000. That extra gain pushes your total return above 4%.

The opposite happens when a bond trades above face value (called a premium). If that same $1,000 bond with a 4% coupon trades for $1,050, you'll still get $40 a year, but you'll lose $50 at maturity when you're paid only $1,000. That loss reduces your total return below 4%.

YTM captures both scenarios in one number. It's the discount rate that makes the present value of all future cash flows (the coupon payments plus the face value at maturity) equal to the price you paid today.

Why YTM changes when interest rates move

Bond prices and interest rates move in opposite directions. When new bonds are issued with higher coupon rates, older bonds with lower coupons become less attractive and their prices fall. When prices fall, the YTM rises — because you're buying at a bigger discount. The reverse happens when interest rates drop: new bonds have lower coupons, old bonds become more attractive, prices rise, and YTM falls.

This is why a bond's YTM is not fixed. The coupon rate never changes, but the YTM changes every day as the bond's price moves in the market. If you buy a bond today at a certain YTM and hold it to maturity, you'll earn that YTM. But if you sell before maturity, your actual return depends on what price you sell at.

Using YTM to compare bonds

YTM lets you compare the value of different bonds on equal footing. A 10-year bond and a 5-year bond have different coupon rates and prices, but their YTMs tell you which one offers better return per year. A higher YTM usually means either higher risk (the company is less creditworthy) or a better bargain (the bond is trading at a steep discount). You have to look at both the YTM and the company's credit rating to know which it is.

YTM is most useful when comparing bonds from companies in the same industry or credit tier. Comparing a AAA-rated bond with a 3% YTM to a BB-rated bond with a 7% YTM tells you that the riskier bond pays more — but it doesn't tell you whether that extra 4% is worth the extra risk. That's a decision you have to make based on your tolerance for default risk.

What YTM doesn't tell you

YTM assumes you hold the bond until maturity. If you need to sell early, you might get a different return depending on where interest rates have moved. It also assumes the company doesn't default. A high YTM on a risky bond might look attractive, but if the company goes under, you lose money. YTM doesn't account for inflation either — a 4% YTM might look decent until you realize inflation is 3.5%, leaving you with only 0.5% real return.

YTM also doesn't account for taxes. The coupon payments you receive are taxable income in most cases, which reduces your after-tax return. And if you buy a bond at a discount, the gain at maturity is also taxable. Your actual take-home return will be lower than the YTM suggests.

The difference between YTM and current yield

Current yield is simpler but less complete than YTM. It's just the annual coupon payment divided by the current price. A $1,000 bond paying $40 per year and trading at $950 has a current yield of 4.2% ($40 ÷ $950). But that ignores the $50 gain you'll make at maturity, so it understates your true return.

YTM includes that gain, making it the more accurate picture of what you'll earn if you hold to maturity. Current yield is useful as a quick mental check, but YTM is what you should use when making decisions.

How to find a bond's YTM

Most bond data providers — including your brokerage, Bloomberg, and financial websites — publish YTM for corporate bonds. You can also calculate it yourself if you have the coupon rate, current price, face value, and years to maturity, though the math requires a financial calculator or spreadsheet because YTM is solved iteratively. Many online bond calculators will do it for you if you enter those four pieces of information.

When you're shopping for bonds through a broker, the YTM is usually displayed right next to the price. Use it as your starting point for comparison, but always check the credit rating and the company's financial health before you buy.

Frequently Asked Questions

If I buy a bond with a 5% YTM, will I definitely earn 5% per year?

You will earn 5% per year only if you hold the bond to maturity and the company doesn't default. If you sell early, your actual return depends on the price you sell at. If the company defaults, you may lose money.

Why is the YTM higher than the coupon rate on the bond I'm looking at?

The bond is trading at a discount — below its face value. You're buying it cheaper than it's worth at maturity, so that gain boosts your total return above the coupon rate. The bigger the discount, the higher the YTM relative to the coupon.

Does a higher YTM always mean a better bond to buy?

No. A higher YTM usually means higher risk — the company is less creditworthy or the bond is less popular. Compare the YTM to the credit rating. A high YTM on a risky bond might not be worth the default risk, while a lower YTM on a solid company might be the safer choice.

How does inflation affect the YTM I'll actually earn?

YTM doesn't account for inflation. If a bond has a 4% YTM and inflation runs 3%, your real return is only about 1%. You earn the full 4% in dollars, but those dollars buy less than they did when you bought the bond.