What is 'Yield to Maturity (YTM)'? Definition & meaning

What is yield to maturity and why is it useful?

Yield to Maturity (YTM) calculates the annualised return you would get on a bond if you held it until its redemption date. It’s a handy way to compare different bonds, as it lets you see which bond might give the highest return over time, taking into account all aspects of the bond, like its price, maturity date, and face value.

You might buy the bond at a price that’s different from its face value. When the price is less than its face value, the bond is trading at a “discount”. When it’s more than its face value, it’s trading at a “premium”.

If you’re buying a bond with a maturity less than or more than a year, remember that YTM is an annualised figure. So, for example, if you have a 28-day UK Treasury Bill, you will get the annualised YTM, but only for the 28 day period between when you buy it and it matures.

More terms

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Packaged Retail and Insurance-based Investment Product (PRIIP)

An investment where, regardless of its legal form, the amount repayable to the retail investor is subject to fluctuations.

Gross Margin

The difference between a company's revenue and the cost to produce its goods/services, divided by revenue.

Time Value of Money

The concept that money you have now is more valuable than the same sum in the future.

Volatility

A measure of how much the prices of an asset or index vary over time.

Compound interest

Understand what compound interest means and how it's calculated

Ponzi Scheme

A form of fraud designed to lure new investors, and pays the earlier backers by using the new investors' money.

Key Information Document (KID)

A document issued by an investment fund to help investors determine if it's the right fund for them.

Accounting standards

The rules a company follows when preparing financial statements.

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Yield to maturity