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

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.

Annualised Rate of Return

The average annual return an investor sees over a set period of time.

Diversification

An investment strategy in which money is put into a variety assets.

Global Investment Performance Standards (GIPS)

A set of standards which investors use to present their investment results.

Money laundering

A method of moving money obtained illicitly through the financial system so it can be used legally.

Fixed Income

An investment that provides a fixed rate of return, often over a specific set of time.

Maturity value

What's the maturity value of a bond?

Hypothesis Testing

A mathematical test used to determine whether a claim is true or false.

Accrued interest

The interest earned on a gilt since the last dividend date. When buying a gilt, the buyer pays the accrued interest at the time of a transaction to the seller in addition to the clean price of the gilt

Freetrade does not provide investment advice and individual investors should make their own decisions or seek professional advice. The value of investments can go down as well as up and you may receive back less than your original investment. Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).

Yield to maturity