Yield to Maturity (YTM) is the total return an investor is expected to earn on a bond if it is held until maturity, considering interest payments, purchase price, face value, and time remaining.
Yield to Maturity (YTM) is one of the most important measures used in bond and fixed-income investing. It represents the annualized return an investor will receive if the bond is bought at the current market price and held until it matures, assuming all interest payments are reinvested at the same rate.
Unlike current yield, which only looks at annual interest income, YTM gives a complete picture of bond returns. It includes:
Annual coupon (interest) payments
Capital gain or loss (difference between purchase price and face value)
Remaining time to maturity
YTM is widely used to compare bonds with different prices, coupon rates, and maturities. A higher YTM may look attractive, but it can also reflect higher risk, such as credit risk or interest rate risk.
"Suppose an investor buys a bond with a face value of ₹1,000 for ₹900. The bond pays ₹80 annually and matures in 5 years. Since the bond was bought at a discount and pays regular interest, the Yield to Maturity will be higher than the coupon rate, reflecting both interest income and capital gain."