Yield to maturity
The single rate equating a bond's price with its cash flows. A promised return, realised only if it is held, paid, and every coupon reinvested at that same rate.
Where you will meet it
Yield to maturity appears in 11 learning outcomes on the CFA syllabus. A few of them:
- Contrast current yield with yield to maturity
“Yield to maturity is the single discount rate that makes the present value of all the bond's cash flows equal its price, so it takes in the coupon, the capital gain or loss to redemption and the timing of both.”
- Work out, from market prices, the return implied by a bond and the growth rate implied by a stock
“For a coupon bond, the yield to maturity is the single rate that equates the present value of the coupons and principal to the price; it is found by trial or a calculator, and it sits below the coupon rate when the bond trades at a premium.”
- Work out what debt costs a firm after tax
“For a listed bond that is its yield to maturity; where no bond trades, it is estimated from the yields of comparable issuers with similar ratings and maturities.”
- Explain how the yield curve's shape, spot and forward rates, yield to maturity, and expected and realized bond returns relate to one another
“Spot rates price single cash flows, forward rates are the rates for future periods locked in by today's spot curve, and yield to maturity is one blended rate that equates a bond's price with all its cash flows.”
Learn it properly
Practise it
Practise yield to maturity until it is automatic: questions that explain every wrong option.
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