Glossary
Yield to Maturity (YTM)
The total return if you hold a bond to maturity
Yield to maturity is the annual return you actually earn buying a bond today and holding it to maturity. Unlike the coupon rate, it reflects the current market price.
Three things enter the calculation: the annual interest, the principal repaid at maturity, and the price you pay now. Buying below face value adds that difference to your return.
So a bond with a 5% coupon can yield 6% if bought cheaply, or 4% if bought dear. It is the real figure to compare when choosing between bonds.
When market rates rise, bond prices fall and yields to maturity rise. The rate quoted when news reports that government bond yields rose is usually this one.
It carries one assumption: that interest received is reinvested at the same yield. Since actual rates vary over time, the final outcome can differ somewhat. A high yield to maturity does not mean a good bond. If the price fell because of default risk, that yield is simply compensation for the danger. Reading it alongside the credit rating is therefore basic practice.