BondTerminal

What is yield to maturity (YTM) and how is it calculated?

YTM is the single most-quoted bond statistic. It is also one of the most misunderstood. Here is what it actually represents.

The direct answer

Yield to maturity (YTM) is the single constant discount rate that, when applied to a bond's remaining coupon and principal payments, makes their present value equal the bond's dirty price today. It is the bond market's standard summary statistic — one number that captures the bond's expected return if held to maturity and reinvested at that same rate.

Concretely, YTM is the solution y to the equation: dirty price equals the sum, over every remaining cash flow, of (cash flow) divided by (1 plus y/n) raised to the (time × n) power, where n is the number of coupon periods per year. There is no closed-form formula; calculators solve it numerically.

What YTM assumes

  • You hold the bond to maturity. Selling earlier gives you a realized yield that depends on the future price, not the YTM.
  • You reinvest every coupon at the same YTM rate. In reality, reinvestment rates move with the curve.
  • The issuer pays every cash flow in full and on time. YTM bakes in zero credit-event probability.
  • For amortizing or callable bonds, YTM assumes the scheduled amortization or the worst-case call date (yield-to-worst).

Frequently asked questions

Is YTM the same as IRR?
Yes — YTM is the internal rate of return (IRR) of the bond's cash flows at the dirty price. The math is identical. The bond market just calls it YTM and quotes it on an annualized basis matching the coupon frequency.
Why is BondTerminal's YTM slightly different from another platform's?
Differences usually come from one of: day-count convention (30/360 vs ACT/ACT vs ACT/365), compounding convention (semi-annual vs annual), settlement date, or assumed call schedule for callable bonds. BondTerminal lets you inspect every assumption on the calculator page.
Does YTM assume reinvestment at the YTM rate?
Yes — that is the most criticized assumption. If you reinvest coupons at a lower rate, your realized yield will be below the quoted YTM. Many practitioners report 'yield-to-worst' for callable bonds and 'realized yield' or 'horizon yield' to address this.
What is yield-to-worst?
For callable bonds, yield-to-worst is the lowest yield among all possible call and maturity scenarios. It is the conservative quote — what you get if the issuer calls at the least favorable time for you.

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