# Bond Yield to Maturity

What does bond yield to maturity mean? How is it computed? The answers are forthcoming.

Omkar Phatak

Last Updated: Mar 6, 2019

Definition

Bond yield to maturity rate is the overall rate of returns that an investor will get per year, from the payment of coupons and principal value, till the end of maturity period. In short, it is the total percentage of profits that you will receive from your investment in bonds until maturity.

Formula

Here is the required formula for calculation of the yield to maturity (YTM):

YTM (%) = [{(Bond Par Value - Purchase Value) + (Interest Earned Over Maturity Period)} ÷ {Par Value of Bond}] ÷ [Number of Maturity Years] x 100

YTM (%) = [{(Bond Par Value - Purchase Value) + (Interest Earned Over Maturity Period)} ÷ {Par Value of Bond}] ÷ [Number of Maturity Years] x 100

Calculation

Say, a bond is purchased at a value of USD 900 and par value of USD 1000. The coupon rate is 5% and the maturity period is 4 years.

The interest earned, according to coupon rate of 5%, on the purchase value of USD 900 each year is USD 45. For 4 years, the total interest earned will be USD 180. Substituting all the known values in the given formula, we get:

The interest earned, according to coupon rate of 5%, on the purchase value of USD 900 each year is USD 45. For 4 years, the total interest earned will be USD 180. Substituting all the known values in the given formula, we get:

Investing in stocks and bonds requires a lot of study and such calculations are a part of it. We hope this example has made the calculation simple for you. Just work out some more examples to know how the formula is used.