What is 'Yield to maturity'? | Freetrade Dictionary

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

Net Asset Value (NAV)

The value of a company's assets relative to the number of shares it has.

index-linked gilts

Gilts where the dividends and principal repayments are related to movements in the Retail Prices Index (RPI). This is as opposed to a conventional gilt, where the dividends and principal repayments are fixed in nominal terms.

Dirty price

The total price payable on the purchase of a gilt. It’s calculated as the clean price plus accrued interest.

After-hours trading

Trading outside of a stock exchange's opening hours.

Account balance

The amount of money a user has stored in a financial repository.

Yield curve

A graphical representation of interest rates over time

Maturity date

The date on which a gilt is redeemed and the gilt holder receives the repayment of the nominal amount and final dividend or coupon payment.

UK Treasury bill

A debt instrument issued by the UK government with a maturity of less than one year.

Equity ETF

An exchange-traded fund that is comprised of a set of stocks.

Yield to maturity