What Is Yield to Maturity and Why It Matters to Bond Investors
When I evaluate a bond, I try to look beyond the coupon rate printed on the offer document. The question I really want answered is: If I buy this bond today and hold it until it matures, what annual return am I likely to earn? That is exactly where what is yield to maturity becomes an essential concept for me as a bond investor.
Yield to Maturity (YTM) is the approximate annualized return I may earn if I purchase a bond at its current market price, receive all coupon payments on time, and get the principal back at maturity—assuming I hold the bond until the end. In other words, YTM attempts to capture the “full picture” return: coupon income plus any gain or loss due to buying the bond at a discount or premium to its face value.
This matters because bonds rarely trade exactly at face value. If I buy a bond below face value (say ₹950 for a bond that returns ₹1,000 at maturity), I gain ₹50 over the holding period, which improves my effective return. If I buy above face value (say ₹1,050), that extra ₹50 reduces my effective return. YTM helps me compare these situations on a like-for-like basis.
Why YTM is more informative than the coupon rate
The coupon rate tells me the interest calculated on face value, not on the price I actually pay. For example, a 9% coupon on a ₹1,000 face value bond pays ₹90 per year. But if I buy that bond for ₹920, the ₹90 coupon is a higher return on my purchase price than it appears. Conversely, if I buy it for ₹1,080, the same ₹90 coupon feels less attractive. YTM incorporates that difference, which is why I rely on it for comparisons.
What assumptions I keep in mind
YTM is useful, but it is not a promise. It assumes I hold the bond to maturity and that the issuer makes payments as scheduled. It also assumes that coupon payments can be reinvested at roughly the same yield—an assumption that may not always hold in changing rate environments. If I plan to sell before maturity, the realized return can differ because the bond’s market price may rise or fall with interest rates and credit spreads.
A simple way I use YTM in decision-making
When I shortlist bonds, I first align them with my time horizon and risk appetite. Then I compare YTMs across options of similar maturity and credit quality. A higher YTM can be attractive, but I remind myself to ask why it is higher. Sometimes the market is pricing in higher credit risk, lower liquidity, or greater interest-rate sensitivity.
Buying access and doing due diligence
Today, many investors buy bonds online, which makes access simpler. However, I still treat due diligence as non-negotiable: I check the issuer’s credit profile, the bond’s structure (secured or unsecured), maturity, and liquidity indicators, and I read the key risk factors. YTM is an important metric—but I use it as one part of a disciplined process, not as the only decision trigger.
In practice, understanding what is yield to maturity helps me compare bonds more intelligently, avoid misleading headline rates, and build a portfolio where expected returns are aligned with real risks.