Yield to maturity
By Jude Wallis
Yield to maturity is the single discount rate at which a bond's remaining coupons and its face value, discounted back to today, equal the price paid for it.
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Three rates sit on every bond and only one of them is comparable across bonds. The coupon rate is fixed against face value and never moves. Current yield divides the annual coupon by the price paid. Yield to maturity is the only one that also counts the face value arriving at redemption, which is why a bond bought below face yields more than its coupon rate and a bond bought above face yields less.
There is no algebra that isolates the rate once more than one coupon is left, so every quoted yield to maturity was found by search: try a rate, price the bond, move, repeat. Day count and settlement conventions live inside that search, which is why two systems can quote the same bond a basis point apart.
Read forward, the figure assumes each coupon can be put back to work at the yield itself. The yield to maturity calculator runs the solve, and how yield to maturity works covers the reinvestment assumption in full.