what is yield to maturity ytm 
yield to maturity ytm is considered a long term bond yield but is expressed as an annual rate it is the internal rate of return irr of an investment in a bond if the investor holds the bond until maturity with all payments made as scheduled and reinvested at the same rate yield to maturity is also referred to as book yield or redemption yield ytm accounts for the present value of a bond s future coupon payments and factors in the time value of money investopedia jessica olahytm formulasbonds are priced at a discount at par or a premium at par the bond s interest rate equals its coupon rate above par the bond is called a premium bond with a coupon rate higher than the realized interest rate a bond priced below par called a discount bond has a coupon rate lower than the realized interest rate calculating ytmto calculate ytm on a bond priced below par investors plug in various annual interest rates higher than the coupon rate to find a bond price close to the researched bond price calculations of yield to maturity assume that all coupon payments are reinvested at the same rate as the bond s current yield and account for the bond s current market price par value coupon interest rate and term to maturity the ytm is a snapshot of the return on a bond because coupon payments cannot always be reinvested at the same interest rate as interest rates rise the ytm will increase as interest rates fall the ytm will decrease investors can approximate ytm using a bond yield table financial calculator or online ytm calculator ytm vs coupon rateunlike stock investments bond issuers promise to pay the holder the full face value once it matures bonds come with two metrics ytm and coupon rate ytm is the total return expected on a bond if it s held until maturity the coupon rate is the total amount the bond pays in income to the bondholder for as long as they hold it the coupon rate is the interest paid annually on the bond s face value a bond s ytm fluctuates over time the coupon rate remains fixed trial and error examplean investor holds a bond whose par value is 100 the bond is priced at a discount of 95 92 matures in 30 months and pays a semi annual coupon of 5 therefore the current yield of the bond is 5 coupon x 100 par value 95 92 market price 5 21 to calculate ytm the cash flows must be determined first every six months semi annually the bondholder receives a coupon payment of 5 x 100 2 2 50 in total they receive five payments of 2 50 in addition to the face value of the bond due at maturity which is 100 next we incorporate this data into the formula in this example the par value of the bond is 100 but it is priced below the par value at 95 92 meaning the bond is priced at a discount the annual interest rate must be greater than the coupon rate of 5 investors calculate and test several bond prices by plugging various annual interest rates that are higher than 5 into the formula above taking the interest rate up by one and two percentage points to 6 and 7 yields bond prices of 98 and 95 respectively because the bond price in the example is 95 92 the list indicates that the interest rate is between 6 and 7 having determined the range of rates investors take a closer look and make another table showing the prices where ytm calculations produce a series of interest rates increasing in increments of 0 1 instead of 1 0 using interest rates with smaller increments calculated bond prices are as follows the present value of this bond is equal to 95 92 when the ytm is at 6 8 fortunately 6 8 corresponds precisely to the bond price so no further calculations are required if the investor found that using a ytm of 6 8 in their calculations did not yield the exact bond price they would continue trials and test interest rates increasing in 0 01 increments variations of ytmyield to maturity has variations that account for bonds with embedded options 