What is Yield to Maturity (YTM)? (Plain English Definition)
Definition: Yield to maturity is the total return anticipated on a bond if held until it matures, accounting for coupon payments, current price, and the face value received at maturity.
Yield to Maturity (YTM) Explained Simply
Yield to maturity (YTM) is the most comprehensive measure of a bond's expected return. It calculates the total return you would earn if you bought the bond at its current market price and held it until maturity, receiving all coupon payments along the way and the face value at the end. YTM accounts for whether you bought the bond at a premium or discount to face value.
If you buy a bond at a discount (below face value), the YTM will be higher than the coupon rate because you gain from both the coupon payments and the price appreciation as the bond converges to face value at maturity. If you buy at a premium, the YTM will be lower than the coupon rate because the price will decline to face value.
For bond ETFs, the weighted average YTM of all holdings is the single best indicator of what return you can expect going forward, assuming bonds are held to maturity and no defaults occur. This makes YTM particularly useful for comparing bond ETFs -- it captures the combined effects of coupon rates, current prices, and time to maturity in a single number.
Yield to Maturity (YTM) Example
A bond ETF holds bonds with an average coupon rate of 3.5% but an average YTM of 5.0%. This tells you the bonds are trading below face value (at a discount) because current market rates are higher than when these bonds were issued. The 5.0% YTM means that if you invest $10,000 today and the bonds are held to maturity, you can expect to earn approximately 5.0% per year -- $500 annually -- combining both coupon income and the gradual price appreciation as bonds converge to face value.
Why Yield to Maturity (YTM) Matters for ETF Investors
YTM is the most important number to check when evaluating a bond ETF because it represents the best estimate of future returns. Unlike the coupon rate (which is backward-looking) or the current yield (which ignores price changes), YTM provides a complete forward-looking return estimate. For ETF investors, comparing YTMs across bond funds gives you a clear picture of expected returns. A fund with a higher YTM will generally deliver better returns if credit quality is similar. However, higher YTM often comes with higher risk -- either longer duration (more interest rate sensitivity) or lower credit quality (more default risk). Understanding YTM helps you assess whether the extra yield adequately compensates for the extra risk.
Yield to Maturity (YTM) vs Coupon Rate
| Yield to Maturity (YTM) | Coupon Rate |
|---|---|
| Yield to maturity is the total return anticipated on a bond if held until it matures, accounting for coupon payments, current price, and the face value received at maturity. | See full definition of Coupon Rate |
While yield to maturity (ytm) and coupon rate are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Coupon Rate
The coupon rate is the annual interest rate paid by a bond, expressed as a percentage of the bond's face value.
Bond
A bond is a fixed-income investment where you lend money to a government or corporation in exchange for regular interest payments and the return of principal at maturity.
Duration
Duration measures a bond or bond fund's sensitivity to interest rate changes, expressed in years -- the higher the duration, the more the price moves when rates change.
Maturity
Maturity is the date on which a bond's principal is repaid to the investor and interest payments cease.
Face Value (Par Value)
Face value is the nominal value of a bond stated on the certificate, typically $1,000, which is the amount the issuer promises to repay at maturity.
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