Yield to Maturity (YTM)
Definition
Yield to Maturity (YTM) is the annualised total return you would earn if you buy a bond at today’s price, receive all coupons on time, reinvest coupons at the same yield, and hold to maturity—using the bond’s dirty price (clean price + accrued interest).
Key Takeaways
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All-in return: includes coupons and price gain/loss back to par at maturity.
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Based on dirty price: accrued interest matters at purchase/sale.
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Assumptions: hold to maturity and reinvest coupons at the YTM rate.
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Not a promise: actual return differs if you sell early or reinvest at different rates.
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For callable bonds: also check Yield to Call (YTC).
Formula (conceptual)
Dirty Price = sum_{t=1..N} [ C / (1 + y)^t ] + F / (1 + y)^N
where: C = coupon per period, F = face value, N = number of periods
(In practice, y is solved numerically with a calculator/tool.)
Quick approximation (sense-check)
YTM ≈ ( Annual Coupon + (F − P_clean)/Years ) / ( (F + P_clean)/2 )
Nigeria Example (illustrative)
Face = ₦1,000,000; coupon = 13% (semi-annual); 8 years left;
clean price = 102.50% (₦1,025,000); accrued = ₦6,500 → dirty = ₦1,031,500.
Approx YTM ≈ (130,000 + (1,000,000 − 1,025,000)/8) / ((1,000,000 + 1,025,000)/2)
≈ 126,875 / 1,012,500 ≈ 12.53% (rough)
YTM vs Current Yield vs YTC
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Current Yield = Coupon / Clean Price (ignores maturity and reinvestment).
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YTM = Coupons + pull-to-par, annualised, using dirty price.
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YTC = Same idea as YTM but to the first call date (relevant for callable bonds).
Common Pitfalls
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Using clean instead of dirty price to compute YTM.
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Ignoring accrued interest at settlement.
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Comparing YTMs with different coupon frequencies without normalising.
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Assuming YTM is your guaranteed return (reinvestment risk is real).
Mini-FAQ
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Does a higher coupon mean higher YTM? Not always—price and time to maturity also drive YTM.
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Why did my YTM change after purchase? Market rates and prices moved; YTM is a market-implied return.
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Which price do I enter? Use the dirty price (clean + accrued).
Related Terms
Bond · Coupon · Clean Price · Dirty Price · Duration · Yield to Call (YTC) · Eurobond · Sukuk
