Yield to Maturity (YTM)
Highly related to Market Yield to Maturity
Yield to Maturity (YTM) is the annualized rate of return an investor earns by holding a Bond until it matures, assuming all coupon payments are reinvested at this same YTM rate. It is the discount rate that equates the bond’s Present Value of future cash flows with its current market price.
In essence, YTM represents the bond’s Internal Rate of Return based on current prices and promised payments.
Calculating
Given a bond and cash flows, two excel functions can be used to calculate it.
- Excel Function - IRR: Use the IRR function on the series of cash flows, including the negative initial investment (bond price) and all future coupon payments plus principal repayment.
- Excel Function - RATE: Use the RATE function with the number of periods, coupon payment, present value (negative bond price), and future value (face value).