Yield to Maturity (YTM) Explained

When investors look at bonds, they often notice two numbers:

• Coupon rate

• Yield to Maturity (YTM)

Understanding Yield to Maturity (YTM) is essential for evaluating bond returns.

What Is Yield to Maturity?

Yield to Maturity is the annualised return a bond is expected to generate if:

1. The bond is held until maturity

2. All payments are made on time

YTM considers:

• Current market price

• All remaining interest payments

• Final repayment of face value

It links price and return.

What YTM Is Not

YTM is:

• Not a guarantee

• Not a prediction

• Not the same as coupon rate

It is a mathematical calculation based on today’s price and defined cashflows.

Example: Understanding YTM

Assume:

• Face value = ₹1,000

• Coupon rate = 10%

• Annual interest = ₹100

Situation 1: Buying at ₹950 (Discount)

You pay ₹950.

You receive ₹100 annually.

At maturity, you receive ₹1,000.

Because you invested less but receive full principal, your return is higher than 10%.

YTM > Coupon Rate.

Situation 2: Buying at ₹1,050 (Premium)

You pay ₹1,050.

You still receive ₹100 annually.

At maturity, you receive ₹1,000.

Because you invested more than face value, your return is lower than 10%.

YTM < Coupon Rate.

Situation 3: Buying at ₹1,000 (Par)

You pay ₹1,000.

You receive ₹100 annually.

At maturity, you receive ₹1,000.

No capital gain or loss.

YTM = Coupon Rate.

Why YTM Matters

Coupon tells you interest on face value.

YTM tells you the effective return based on the price you pay.

As bond price changes, YTM changes automatically — even if coupon remains constant.

Two investors holding the same bond may earn different yields depending on purchase price.

Important Assumption

YTM assumes:

Bond is held till maturity

Issuer makes all payments

If you sell early or issuer defaults, actual return may differ.