Yield to maturity

The Yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule. Yield to maturity is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond. The YTM is often given in terms of Annual Percentage Rate (A.P.R.), but more usually market convention is followed. In a number of major markets (such as gilts) the convention is to quote annualised yields with semi-annual compounding (see compound interest); thus, for example, an annual effective yield of 10.25% would be quoted as 10.00%, because 1.05 × 1.05 = 1.1025.