What it means
The abbreviation is used so heavily in fixed income that many people meet YTM before they meet the full term. On a trading screen a bond line typically shows price, coupon, maturity date and YTM, and it is the YTM column that traders scan because it is the only figure directly comparable across different bonds.
Quoting conventions catch people out. YTM is almost always stated as an annual percentage even when coupons are paid twice a year, and different markets annualise slightly differently, so a bond quoted at 5.00% in one convention can appear as 5.06% in another.
In a corporate finance context YTM turns up as the cost of debt input in a weighted average cost of capital calculation. Analysts use the YTM on the company's own traded bonds, or on bonds of similar credit quality if the company has none, because that reflects what lenders would charge today.
The abbreviation sits alongside two relatives worth knowing. YTC is yield to call, the return if the issuer repays early, and YTW is yield to worst, the lower of the two, which is the figure most cautious investors work from.
A high YTM is not automatically good news. Yield rises when price falls, so an unusually high figure often means the market has doubts about whether the issuer will pay, which is why credit analysis has to sit alongside the number.
In practice
Real-world examples
Example 1
A junior analyst reports that a bond "pays 7%" after reading its coupon. The portfolio manager checks the screen, sees a YTM of 4.1% because the bond trades at $1,140, and corrects the recommendation before it goes to the investment committee.
Example 2
A finance director building a weighted average cost of capital model pulls the YTM on the company's 2031 bonds, currently 6.8%, and uses it as the pre tax cost of debt instead of the 5% coupon the company happens to pay.
Example 3
A credit analyst spots a bond quoting a YTM of 19% against a sector average near 6%. Rather than treating it as a bargain, she reads it as the market pricing a serious chance of default and looks at the issuer's cash position first.
Think of it
YTM is the abbreviation for Yield to Maturity-total return if held to maturity.
Formula
Calculation
YTM is the discount rate at which the present value of a bond's remaining coupons plus its face value equals the market price. The usual approximation is: YTM = [annual coupon + (face value - market price) / years to maturity] / [(face value + market price) / 2].
Take a $1,000 face value bond with a 4% coupon, paying $40 a year, trading at $1,080 with 5 years to run. The premium of $1,080 - $1,000 = $80 is lost over the remaining life, which is $80 / 5 = $16 a year. The average of face value and price = ($1,000 + $1,080) / 2 = $1,040.
YTM = ($40 - $16) / $1,040 = $24 / $1,040 = 2.31%. The precise calculation gives 2.29%, and both confirm the key point: because the bond was bought at a premium, its YTM of roughly 2.3% is well below the 4% coupon printed on it.Case study
Seen in the real world
The following is an illustrative and fictional example. Marlowe Wealth, an invented advisory firm, produced client statements that listed each bond's coupon rate under a column headed "yield" because the reporting system had been configured that way years earlier.
Clients holding premium bonds bought above face value therefore saw 6% and 7% figures on paper while their portfolios were actually returning closer to 3%. Nobody noticed until a retired client compared his statement with an online broker screen showing YTM and asked why the two disagreed by three percentage points.
Marlowe's fictional compliance review concluded the statements were misleading even though no individual number was untrue. The firm rebuilt its reporting to show coupon, price and YTM side by side, and added a plain English note explaining that a bond bought above face value yields less than its coupon suggests.
Watch out
Common mistakes
- Reading the coupon rate as the yield, which overstates the return on any bond trading above its face value.
- Comparing YTM figures from two sources without checking whether both use the same annualisation convention for semi annual coupons.
- Chasing the highest YTM on a screen without asking why it is high, since elevated yields usually reflect market doubts about repayment.
Questions
People also ask
Is YTM the same as yield to maturity?
Yes, it is simply the abbreviation, used almost universally on bond screens, factsheets and analyst notes.
What does YTW mean when it appears next to YTM?
Yield to worst, the lowest yield achievable across maturity and every possible call date, which is the safer figure to plan around.
Can YTM be negative?
Yes, it happened widely on some government bonds during periods of very low rates, meaning investors paid more than they would ever receive back in coupons and principal.