YTM

Full form: Yield to Maturity

Investments

Yield to Maturity is the total return an investor earns if a bond is held until it matures, accounting for all coupon payments and the difference between purchase price and face value. It is the standardised metric for comparing bonds and debt mutual funds.

In detail

YTM interpretation:nBond bought at face value: YTM = coupon ratenBond bought at discount (price coupon ratenBond bought at premium (price > face value): YTM < coupon ratennDebt mutual fund YTM: the weighted average YTM of all bonds in the portfolio. Approximates the return you will earn if you hold the fund for duration equal to portfolio maturity.nnYTM vs current yield:nCurrent yield = Annual coupon / Current price (does not account for maturity)nYTM = Total annualised return including maturity (more complete)nnFor comparing debt funds: use YTM + credit quality (rating) + modified duration (interest rate risk).

Formula

YTM (approximation) = [Annual Coupon + (Face Value - Price)/Years] / [(Face Value + Price)/2]nnExact YTM requires solving: Price = sum of [Coupon/(1+YTM)^t] + Face Value/(1+YTM)^T

Real-life example

🇮🇳 India example

Debt fund portfolio YTM: 7.8%. Modified duration: 3 years. If held for 3 years and YTM remains stable: expect approximately 7.8% CAGR. If interest rates rise 1% during the period: -3% price impact (duration x rate change), but earned coupons offset partially. Net: still likely positive. YTM tells you the expected return; duration tells you the interest rate risk.

Frequently asked questions

How is YTM useful for debt fund comparison? ▼
Higher YTM = higher expected return but often higher credit risk. Compare two similar funds: Fund A YTM 7.5% (AA/AAA portfolio), Fund B YTM 9.5% (AA-/A portfolio). Fund B has higher expected return but accepts lower-rated bonds. The 2% extra yield is compensation for default risk. For conservative investors: prefer lower YTM with higher credit quality.