Yield to maturity: the complete measure of a bond's expected return
Yield to maturity is the single most important number in fixed income investing. It is the internal rate of return of all a bond's future cash flows—coupons and principal repayment—given the price paid for the bond today. Unlike the coupon rate, which is fixed at issuance and tells you nothing about the return available to a secondary market buyer, yield to maturity reflects both the income and any price gain or loss embedded in the current market price. When investors say a bond yields 4.5%, they almost always mean its yield to maturity.
What yield to maturity is
The coupon rate and the yield to maturity describe the same bond from two different perspectives. The coupon rate is the annual interest payment expressed as a percentage of the bond's face value—it is set at issuance and never changes. A bond with a face value of USD 1,000 and a coupon rate of 3% pays USD 30 per year regardless of where the bond subsequently trades.
Yield to maturity answers a different question: given the price I am paying today, what is my annualised return if I hold the bond to maturity and all payments are made as scheduled? If the bond trades at a discount to its face value—say USD 900—the yield to maturity will be higher than the coupon rate, because in addition to receiving USD 30 per year in coupons, the investor will also receive USD 1,000 at maturity for a bond they paid USD 900 for—a capital gain of USD 100. If the bond trades at a premium—say USD 1,100—the yield to maturity will be lower than the coupon rate, because the investor will receive USD 1,000 at maturity for a bond they paid USD 1,100 for—a capital loss of USD 100.
How it is calculated
Yield to maturity is the discount rate that sets the present value of all future cash flows equal to the bond's current price. There is no closed-form solution; it is solved iteratively. The yield to maturity satisfies the equation: Price = C/(1+y) + C/(1+y)² + … + C/(1+y)ⁿ + F/(1+y)ⁿ, where C is the periodic coupon payment, F is the face value, n is the number of periods to maturity, and y is the yield per period. In practice, spreadsheets and financial calculators solve this instantly.
Several yield variants refine this basic measure. Yield to call applies to callable bonds—bonds the issuer can redeem before maturity—and calculates the return assuming the bond is called at the earliest opportunity. Yield to worst is the lowest of yield to maturity, yield to call, and any other applicable yield measures; it represents the worst plausible return the investor might receive given the bond's embedded options. For callable bonds, yield to worst is often the more relevant figure.
What the evidence shows
Research on bond returns has consistently confirmed that the starting yield to maturity is the best single predictor of future bond returns over holding periods comparable to the bond's duration. Studies of US Treasury markets covering 1926–2020 have found that over five-year rolling periods, the yield to maturity at the start of the period explained approximately 80% of the variance in subsequent total returns. This predictive relationship is much stronger for bonds than the equivalent relationship between valuation metrics and future equity returns, reflecting the contractual nature of bond cash flows.
The implication is practical: investors buying bonds in a high-yield environment have historically earned higher subsequent returns than investors buying in a low-yield environment, largely independent of subsequent price movements. Yield to maturity is genuinely a forward-looking return estimate in a way that few other financial metrics are.
Limitations and trade-offs
Yield to maturity assumes that all coupon payments are reinvested at the same yield to maturity for the life of the bond. In practice, reinvestment rates will differ from the current yield to maturity, introducing reinvestment risk. For bonds with many years to maturity, the reinvestment assumption drives a significant share of the total return, and actual returns may diverge from the stated yield to maturity.
Yield to maturity also assumes no default. For government bonds of strong sovereign issuers, this is a reasonable assumption. For corporate bonds—particularly lower-rated issuers—the probability of default is non-trivial, and the expected return is lower than the yield to maturity by the expected loss from default. The spread between a corporate bond's yield to maturity and the equivalent government bond yield is partly compensation for this expected loss.
Yield to maturity in pfolio
When analysing fixed income positions in pfolio, yield to maturity is the primary return metric for individual bonds. For bond ETFs—which hold a portfolio of bonds with varying maturities and prices—the relevant measure is the fund's weighted average yield to maturity (sometimes called the SEC yield or distribution yield depending on the fund's accounting). Fixed income assets and their yield characteristics are available in the Assets section. Fixed income performance data is visible in pfolio Insights.
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