Definition
YTM is the internal rate of return of a bond's cash flows—coupons plus principal repayment—discounted to equal the current market price. It assumes all coupons are reinvested at the YTM rate. YTM is the most comprehensive measure of bond return and serves as the standard benchmark for comparing bonds of different maturities and coupon rates.
functions Formula
Price = Σ(C/(1+YTM)^t) + Face/(1+YTM)^n
lightbulb Example
A 10-year bond with 5% coupon trades at $950 (face $1,000). YTM ≈ 5.6%, reflecting the coupon yield plus the capital gain from buying below par.
verified_user Key Points
- Most comprehensive bond return measure
- Assumes reinvestment at the YTM rate
- Higher YTM for bonds trading below par (discount)
- Callable bonds use yield-to-call instead