Yield to Maturity

The yield to maturity on a bond is the rate of return that an investor would earn if he bought the bond at its current market price and held it until maturity. It represents the discount rate which equates the discounted value of a bond's future cash flows to its current market price. This is illustrated by the following equation:

where

• B₀ = the bond price,
• C = the annual coupon payment,
• F = the face value of the bond,
• YTM = the yield to maturity on the bond, and
• t = the number of years remaining until maturity.

The yield to maturity usually cannot be solved for directly. It generally must be determined using trial and error or an iterative technique. Fortunately, financial calculators make the task of solving for the yield to maturity quite simple.