Yield to maturity (YTM)
Fixed IncomeDefinition
The total annual return you will earn on a bond if you hold it until it matures AND you reinvest every interest payment at the same rate. YTM is the single number that lets you compare bonds with different prices, different coupons, and different maturities on the same scale.
Key rule of thumb: if you pay ABOVE the bond's face value, your YTM will be LOWER than the stated coupon rate. If you pay BELOW face value, your YTM will be HIGHER than the coupon.
Key rule of thumb: if you pay ABOVE the bond's face value, your YTM will be LOWER than the stated coupon rate. If you pay BELOW face value, your YTM will be HIGHER than the coupon.
Formula
YTM is the rate that makes: Price = total of all future coupons + face value, each discounted back to today.
Example
A 10-year Treasury bond with a 4% coupon is on sale for $98 (below its $100 face value). Your YTM is about 4.24% because you get the 4% interest each year AND pocket a $2 gain when it matures at $100.