Definition
Yield to maturity (YTM) is the single annualized rate that discounts all of a bond's remaining scheduled coupons and principal to its current market price. It summarizes the return implied by buying at today's price and holding until maturity.
How it works
YTM has no simple closed-form solution for most bonds, so it is found by trial and error or a financial calculator. Price and YTM move in opposite directions. A bond priced below face value has a YTM above its coupon rate, at par the two are equal, and above par the YTM is lower.
The figure assumes the bond is held to maturity, every payment is made on time, and coupons are reinvested at the same yield. If the bond is sold early, defaults, is called, or coupons are reinvested at different rates, the realized return will differ.
Formula / convention
Price = C ÷ (1 + y) + C ÷ (1 + y)^2 + … + (C + F) ÷ (1 + y)^n, solved for y (C = coupon per period, F = face value, n = number of periods, y = yield per period; annual yield quoted as y × periods per year)
Illustrative example
A fictional 2-year bond has a HK$1,000 face value and a 5% annual coupon (HK$50 a year) and trades at HK$981.67. Discounting at 6% gives 50 ÷ 1.06 + 1,050 ÷ 1.06² = 47.17 + 934.50 = HK$981.67, so its YTM is 6.00%, above the 5% coupon because the price is below face value.
What to watch for
A high YTM is not a free bonus: it usually compensates for higher credit, call or liquidity risk, and it ignores taxes and trading costs.