Yield to maturity (YTM): calculation, example and limitations

What does yield to maturity measure?

YTM is the discount rate at which the present value of future coupons and principal repayment equals the bond price. Both amounts and dates matter. It compares cash flows, but is neither a promised profit nor a measure of repayment probability.

The coupon expresses interest relative to face value. Current yield relates annual interest to price and omits gains or losses on redemption. YTM includes redemption and payment timing. When comparing figures, check that annual-rate convention, currency and valuation date are consistent.

Example: one year and one payment

A hypothetical bond has PLN 1,000 face value and a fixed 6% coupon. Assume exactly one annual period to maturity, a single PLN 60 interest payment together with principal, a PLN 950 price, and no accrued interest, costs or tax. The payment after one year is PLN 1,060. This simplified educational example is not an actual series.

The equation is 950 = 1,060 / (1 + r), giving r = 1,060 / 950 − 1, or approximately 11.58%. The coupon remains 6%, while current yield is 60 / 950, approximately 6.32%. Redemption adds the PLN 50 difference between the PLN 950 purchase price and PLN 1,000 principal to PLN 60 interest. Total gross profit under these assumptions is PLN 110.

For the same cash flow at a PLN 1,050 price, annual YTM is 1,060 / 1,050 − 1, approximately 0.95%. With multiple coupons, dividing total interest by the number of years is insufficient: discount each payment separately. Actual calendars, accrued interest and annual-rate conventions require a calculator consistent with issue terms.

Dirty price, commission and tax

Valuing cash flows on the settlement date requires a price including accrued interest, the dirty price. Using only the clean price without the appropriate adjustment overstates calculated yield. Also establish whether the displayed price is a current offer, an old trade or your own assumption.

Gross YTM usually excludes tax and commission. Calculating an after-cost result requires adjusting the initial outlay and relevant cash flows. Do not automatically multiply the entire YTM by 81%: tax rules for interest, discount and sale gains, and the investor’s circumstances, can differ.

When is one number insufficient?

For a floating-rate bond, future rates are unknown and yield depends on a reference-rate projection. Early-redemption rights can alter repayment timing and amounts. Late or missing issuer payments invalidate the assumed schedule. YTM does not incorporate the probability of those events.

For a realized return with reinvestment to match YTM, rates available for reinvesting coupons also matter. The internal rate itself does not guarantee those reinvestment opportunities. Our calculator analyzes supplied inputs; the current catalog provides neither current prices nor a ready-made yield ranking. This material is not investment advice.