The annualised return on a bond bought at today’s price and held to maturity, if every payment arrives as promised and coupons are reinvested at that rate.
Yield to maturity is the single rate that makes the present value of all a bond’s future payments — its coupons plus the final repayment of face value — equal to its current market price. It is the bond market’s version of an annualised return, and the main number for comparing bonds with different coupons, prices and maturities.
Why it matters
Two bonds can carry the same coupon but very different YTMs if one trades above face value and the other below. YTM brings price, coupon and time to maturity into one comparable figure.
How to read it
- Price and yield move in opposite directions. When a bond’s price rises, its YTM falls, and the other way round.
- YTM above the coupon means the bond trades below face value; YTM below the coupon means it trades above.
- A higher YTM often reflects higher credit risk or lower liquidity. The extra yield is compensation for those risks.
Common misconceptions
- “YTM is what I will earn.” It assumes you hold to maturity, every payment arrives on time, and every coupon is reinvested at the same YTM. Change any of these and your realised return changes.
- “A debt fund’s YTM is its expected return.” A fund’s portfolio YTM is a snapshot. Holdings change, prices move with interest rates, and expenses are deducted. It is a useful indicator, not a forecast.
In India: Debt fund factsheets publish the portfolio’s YTM, usually alongside average maturity, Macaulay duration and modified duration.
Formula
Price = Σ [Coupon ÷ (1 + y)^t] + Face value ÷ (1 + y)^n, solved for y. Approximate YTM ≈ [Annual coupon + (Face value − Price) ÷ Years to maturity] ÷ [(Face value + Price) ÷ 2]
Worked example
For illustration, assume a bond with face value ₹1,000, an 8% annual coupon and 5 years to maturity, trading at ₹960. Approximate YTM = [80 + (1,000 − 960) ÷ 5] ÷ [(1,000 + 960) ÷ 2] = 88 ÷ 980 ≈ 8.98%. The exact YTM, found numerically, is about 9.03%.
Figures are for illustration only — not a forecast or a recommendation.
Related terms
Coupon
The interest a bond pays its holder, stated as an annual percentage of the bond’s face value and paid on fixed dates.
Current yield
A bond’s annual coupon divided by its current market price — a quick measure of income relative to what you pay today.
Duration
The weighted average time, in years, to receive a bond’s cash flows — and a guide to how sensitive its price is to interest rates.
Modified duration
An estimate of how much a bond’s price changes, in percent, for a one percentage point change in interest rates.
Face value
The nominal amount of a bond — what the issuer repays at maturity and the base on which coupon payments are calculated.
Interest rate risk
The risk that a bond’s price falls when market interest rates rise — larger for bonds and debt funds with longer duration.