YTM

Yield to Maturity (YTM) is a measure used in fixed income to estimate the total return an investor would receive if a bond is held until it matures, assuming all coupon payments are reinvested at the same rate and the issuer repays the face value at maturity. In essence, YTM is the discount rate that equates the current price of the bond with the present value of its future cash flows, including periodic coupon payments and the redemption of the face value.

Calculating YTM involves solving for the rate i in the equation P = sum_{t=1}^n C_t / (1+i)^t + F / (1+i)^n, where P is the bond price, F is the face value, C_t are the coupon payments, and n is the number of periods. For annual coupons, C_t equals the annual coupon. Many bonds pay semiannually, in which case the coupon per period and the number of periods are adjusted accordingly, and the equation is solved numerically.

YTM is commonly used to compare bonds with different prices, maturities, and coupon structures. It reflects the effect of price movements, time to maturity, coupon rate, and credit risk, and it changes with market interest rates. It is important to note that YTM assumes that all coupon payments are reinvested at the same YTM and that the issuer will repay the face value at maturity, which may not hold in practice. Related concepts include yield to call and yield to worst, which account for call features or other uncertainties.