Yield to Maturity¶
Yield to maturity (YTM) is the single discount rate that equates the present value of all future cash flows—coupons plus final principal repayment—to a bond's current market price. It is the internal rate of return of a bond held to maturity, assuming all coupons are reinvested at the same rate and the issuer does not default. YTM is the standard unit for quoting and comparing bonds because it collapses coupon rate, price, and time to maturity into one number.
HOW IT WORKS¶
YTM is solved iteratively from the bond pricing equation: the current price equals the sum of each coupon payment discounted at rate y, plus the face value discounted at y over N periods. Because no closed-form solution exists, a common approximation is:
YTM ≈ [C + (Face − Price) / N] / [(Face + Price) / 2]
where C is the periodic coupon and N is the number of periods to maturity. YTM moves inversely to price. A bond trading below par carries a YTM above its coupon rate; one trading above par carries a YTM below it. Price sensitivity to yield changes is measured by duration; the curvature of that relationship is convexity. For callable bonds, yield to call is used instead, calculated to the call date and call price rather than maturity.
IN TAPEBOARD¶
Credit traders use YTM to screen bond universes for spread anomalies, comparing each issue's YTM against a duration-matched Treasury to isolate the credit spread. A widening spread signals rising perceived default risk and falling bond price. Equity traders read high-yield YTMs as a cross-asset signal: a bond yielding 12% to maturity indicates the debt market is pricing material distress, which typically has implications for the equity. Aggregate YTM on high-yield indices surfaces in Tapeboard as a macro indicator; historically, junk yields above 10% have coincided with credit stress and recession risk.