Yield to maturity

Yield to Maturity (YTM) is the annualized rate of return an investor can expect if a bond is purchased at its current market price and held until maturity, assuming all coupon payments are received as scheduled and reinvested at the same yield. YTM reflects both coupon income and any capital gain or loss at redemption.

The following formula is used to calculate the yield to maturity of the bond:

Bond Price = Σ (CouponPayment ÷ (1 + Yield ÷ PaymentsPerYear) ^ Period)  + (FaceValue ÷ (1 + Yield ÷ PaymentsPerYear) ^ TotalPeriods)

Zero-coupon bond (special case):

Yield = PaymentsPerYear × ( (FaceValue ÷ BondPrice) ^ (1 ÷ TotalPeriods) – 1 )

• BondPrice – current market price of the bond.
• CouponPayment – payment received each period (FaceValue × CouponRate ÷ PaymentsPerYear).
• Yield – yield to maturity (annualized rate of return).
• PaymentsPerYear – number of coupon payments per year (e.g., 1, 2, or 4).
• Period – the number of the current coupon period (1, 2, 3 …).
• TotalPeriods – total number of remaining coupon periods until maturity.
• FaceValue – nominal value of the bond to be repaid at maturity.

Yield to maturity is a crucial measure as it provides a more comprehensive view of the bond's potential return compared to the current yield. YTM considers not only the periodic interest payments but also any capital gains or losses that may occur if the bond is held until maturity.