Definition
What is Yield to Maturity (YTM)?
The total annualised return a bond investor receives if the bond is held to maturity, assuming all interest payments are reinvested at the same yield.
Yield to Maturity (YTM) is the standard return measure for fixed-income securities — the annualised return an investor receives if they buy the bond at the current price and hold it to maturity, receiving all coupon payments and the face-value redemption.
Calculation requires solving for the discount rate that equates the bond's current market price to the present value of all future cash flows (coupons + face-value redemption at maturity).
Worked example: a NZ wholesale corporate bond with NZ$100,000 face value, 7% annual coupon, 5 years to maturity, currently trading at NZ$95,000: - Future cash flows: NZ$7,000 per year for 5 years + NZ$100,000 at maturity. - Current price: NZ$95,000. - YTM ≈ 8.2% per annum (the rate that discounts those cash flows back to NZ$95,000).
YTM is higher than the coupon rate because the bond trades at a discount to face value — the investor gains both coupon income and a capital gain at redemption.
Three distinct yield concepts: - Current yield — annual coupon / current price (simple). - Yield to maturity — return if held to maturity, accounting for capital gain or loss at redemption. - Yield to worst — the minimum of yield-to-maturity and yield-to-call across all possible scenarios.
Why YTM matters for wholesale investors: - NZ wholesale credit funds sometimes report a portfolio-level YTM as a forward-looking return estimate. - Single-bond positions (corporate debt, government bonds) are typically evaluated on YTM at purchase. - Comparing YTM across bonds with different coupons and maturities is the standard apples-to-apples test.
Limitations: - Assumes coupons can be reinvested at the same yield, which isn't always achievable. - Doesn't account for credit risk (default before maturity wipes out the YTM calculation). - Doesn't account for liquidity risk (selling before maturity at a lower price reduces realised return).
vs Target return: target returns in NZ wholesale credit IMs are typically presented as "target distribution yield" (current income from coupons / interest) rather than YTM (return including any capital gains or losses at maturity). The two metrics measure different things and should not be confused.
Related Terms
IRR (Internal Rate of Return)
The annualized return on an investment accounting for the timing of cash flows.
Private Credit
Non-bank lending to businesses and property developers, offering regular income and typically secured positions.
Senior Secured Debt
Loans ranking first in priority for repayment in a default scenario and secured by specific collateral, typically with the lowest yields in the credit stack.
Educational Content Disclaimer
This glossary provides general educational information only and does not constitute financial, legal, or tax advice. Definitions and explanations are simplified for educational purposes and may not cover all aspects or nuances of each term.
Before making any investment decision, you should seek independent advice from appropriately qualified professionals. Wholesale Investor does not recommend or endorse any particular investment, strategy, or fund manager.