Yield to Maturity

Yield to maturity (YTM) is the single discount rate that equates a bond's market price to the present value of all its future cash flows — coupons and principal. It is the most commonly quoted measure of a bond's return and the number reported in Treasury auction results, on trading screens, and in yield curve charts.

YTM is calculated by solving for y in:

Price = C/(1+y) + C/(1+y)² + ... + (C+Face)/(1+y)ⁿ

where C is the coupon payment, Face is par value, and n is the number of periods to maturity.

YTM assumes two things that rarely hold exactly:

• The bond is held to maturity — if sold early, the realized return will differ based on the price at sale
• Coupons are reinvested at the YTM rate — in practice, reinvestment rates fluctuate with the market, creating reinvestment risk that is larger for long-maturity, high-coupon bonds

Despite these assumptions, YTM remains the standard because it compresses a bond's cash flow profile into a single comparable number. When the Treasury publishes daily yield curve rates, these are par yields — the YTM of hypothetical bonds priced at par for each maturity.

YTM differs from related yield measures:

• Spot rate (zero-coupon yield): the discount rate for a single cash flow at a specific maturity, free of reinvestment assumptions
• Par rate: the coupon rate at which a bond would be priced at par, derived from the spot curve
• Forward rate: the implied yield for a future period, derived from the relationship between spot rates

For zero-coupon bonds (like Treasury STRIPS), YTM and the spot rate are identical because there are no intermediate cash flows to reinvest.