Investor Corner/The asset classes/Debt Concepts
2.2.3 Yield to Maturity (YTM)
Yield to maturity is the total annualised return you would earn by buying a bond today and holding it until it matures, assuming every interest payment is made on schedule and reinvested at the same rate.
A single number capturing the whole picture
YTM accounts for three things at once: the coupon payments you will receive, any difference between the price you paid and the face value you will get back, and the time remaining until maturity. It is the standard way to compare bonds that have different coupons, prices and maturities on a like-for-like basis.
The assumption baked into the number
YTM assumes that every coupon received along the way is reinvested at the same rate as the YTM itself. In practice, interest rates change over time, so this precise assumption rarely holds exactly. YTM is still the most useful single figure for comparing bonds, provided this simplification is kept in mind rather than treated as a guarantee.
Where it is used
Fund factsheets for debt mutual funds typically quote the portfolio's average YTM, giving a reasonable estimate of the return an investor might expect if the underlying bonds were held to maturity and rates stayed roughly stable. Actual fund returns will still differ from this figure because funds continually buy and sell holdings rather than holding every bond to maturity.
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