YTM, Yield to Maturity

Yield to Maturity which is one of the many summary measures for bond valuation is simply another application of Internal Rate of Return, IRR. Thus, it suffers from the same assumptions and limitations of IRR.

To recover return rate that is exactly equal to the YTM for the investment,

• The cash flows must be reinvested at the YTM rate


• The investment must be hold till maturity


• The bond must be redeem at par

Possible cash flows for a couple bond shall include,

• Coupon payments


• Principal recovery


• Reinvestment return

Due to the fact that the cash flows during the lifetime of most bonds (except for non-callable, non-convertible, zero couple bond) are hard to predict, YTM is really a guidance measure instead of exact forecast of the bond return.

• When a bond sells at a discount, YTM > current yield > coupon yield.


• When a bond sells at a premium, coupon yield > current yield > YTM.
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• When a bond sells at par, YTM = current yield = coupon yield.
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