Yield to Maturity

What it measures

Yield to maturity is the internal rate of return of a bond's cash flows — the single constant annual rate that, applied to every remaining coupon and to the face value paid at maturity, discounts them back to today's market price. It answers one narrow question: what annualised return does this price imply if every payment arrives on schedule and nothing else changes? It does not answer what a holder will actually earn, which depends on reinvestment rates, taxes, and whether the issuer pays in full.

The coupon rate is fixed at issue and never moves. Yield to maturity moves every time the price moves, which is why two bonds sharing the same coupon can quote very different yields depending on what each is trading for.

The figure already absorbs the gain or loss from trading away from face value. A bond bought below par earns the coupon plus the pull up to par as it approaches maturity; a bond bought above par earns the coupon minus the pull back down. In the US market the number is quoted on a bond-equivalent basis — a semiannual rate simply doubled — so it is not directly comparable to a bank's annual percentage yield without converting one to the other. It is a price restated as a rate, not a forecast; nobody is promising that the bond will actually deliver it.

How it is calculated

The defining equation sets price equal to the sum, over every remaining payment date, of that payment divided by one plus half the yield, raised to the number of semiannual periods away, with the face value added onto the final payment. There is no algebraic solution for the yield itself; it is found by iteration, which is what a spreadsheet's YIELD or RATE function, or a bond calculator, is doing behind the scenes.

A standard approximation makes the moving parts visible: approximate yield to maturity equals the annual coupon plus the annualised pull to par, divided by the average of face value and price. Illustrative arithmetic, not a market quote: a $1,000 face bond with a $50 annual coupon and five years remaining, bought at $900. The annualised pull to par is (1,000 minus 900) divided by 5, or $20; the average invested amount is (1,000 plus 900) divided by 2, or $950; the approximate yield is (50 plus 20) divided by 950, about 7.4%, well above the 5.0% coupon.

The price fed into either calculation is the invoice, or dirty, price — the quoted clean price plus interest accrued since the last coupon — so a purchase between coupon dates carries a settlement adjustment. Current yield, a simpler and often-confused number, is just the annual coupon divided by price; it ignores maturity and therefore ignores any gain or loss to par. Yield to call runs the identical equation substituting the call price for face value and the call date for maturity, and yield to worst is simply the lowest of the yield to maturity and every yield to call available.

How to read it

Yields are only comparable across bonds of similar maturity and credit quality; a higher figure is almost always compensation for taking on more of one or the other. Corporate and municipal yields are typically quoted as a spread in basis points over the Treasury of matching maturity, and that spread is the part of the number attributable to credit and liquidity risk rather than to the general level of rates.

On callable bonds, yield to worst is the honest headline figure to read. A screen sorted by yield to maturity alone will float premium callable bonds to the top precisely because their early redemption is the likely outcome, not the remote one.

The reinvestment assumption cuts both ways: if rates fall after purchase, realised return will fall short of the quoted yield because coupons get reinvested at less; if rates rise, realised return can exceed it. A zero-coupon bond sidesteps this entirely — there is nothing to reinvest, so its quoted yield is close to the return actually earned if it is held to maturity and paid in full.

Tax sits entirely outside the calculation. Two bonds with identical yields to maturity can leave very different after-tax income depending on whether the interest is taxable, tax-exempt, or accrues as original issue discount, which is the reason taxable-equivalent yield exists as a separate figure.

Where it misleads

The largest gap is the reinvestment assumption: the number quietly assumes every coupon is reinvested at that same rate for the entire life of the bond, an outcome that almost never happens exactly. Related to this, the calculation assumes full and timely payment on every date; on a distressed bond, a very high yield to maturity is not an expected return, it is the market pricing in a real probability of missed or reduced payments.

On callable bonds the figure overstates the likely outcome, because an issuer calls a bond precisely when the bond is worth most to redeem and least attractive to keep, which is the opposite of what the buyer would want.

A bond fund's quoted average yield to maturity is a portfolio statistic, not a promise to any one shareholder, because the fund has no maturity date of its own and the pull to par of its holdings never resolves into a single redemption payment. Comparing a semiannual bond-equivalent yield directly against a deposit account's annual percentage yield can flip the ranking on close calls, since the two figures compound on different schedules. And the number says nothing about the path: a bond can deliver its quoted yield in full over its life while showing a large unrealised loss for years along the way.

Where you will meet it on this site

This is the figure quoted on the bond pages for Treasury, corporate, municipal and agency issues, shown as yield to maturity or, where a call feature exists, as yield to worst. It is also the substance behind every mention of a spread over Treasuries elsewhere on the site — a spread is just the difference between two yields to maturity of matching maturity.

On bond fund and ETF pages, a portfolio's weighted average yield to maturity sits alongside its SEC yield and its distribution rate; the three are related but not interchangeable. The Treasury yield curve itself is nothing more than a plot of yields to maturity across different maturities on a single day. And wherever duration is discussed, yield to maturity is the reference point next to it — duration measures how far a bond's price moves when this yield changes.