13.4 : Calculating the Yield to Maturity

Yield to maturity (YTM) is the expected return an investor can earn by holding a bond until it matures. It is calculated as the discount rate that equates the bond's current market price with the present value of all future cash flows, including coupon payments and the face value. YTM assumes coupons are reinvested at the same rate and the bond is held to maturity.

YTM is influenced by factors such as the bond's price, time to maturity, coupon payments, face value, and market conditions like interest rate changes, inflation, and credit risk. For example, rising interest rates typically decrease bond prices and increase YTM, while falling rates have the opposite effect. Credit quality fluctuations can also impact YTM by altering the bond's perceived risk.

This metric allows investors to evaluate whether a bond's expected return aligns with their financial objectives and risk tolerance. By providing a standardized comparison of bonds with similar risk profiles, YTM helps investors make informed decisions. However, as YTM is sensitive to market dynamics, regular monitoring is essential to support an investor's strategy.