Yield to Maturity: What a Bond's True Return Hides
A bond's coupon rate tells you what it pays, not what you'll earn. Yield to maturity does the second job. It rolls the coupons, the price you actually paid, and the gain or loss waiting for you at maturity into one annual return, which is why a 5% coupon can hand you 6.3% or 3.8% depending on the price on the ticket.
Why isn't the coupon rate my actual return?
The coupon rate is fixed at issue and measured against face value, usually $1,000. Your return is measured against what you paid, which is rarely face value. If you buy below par you'll also pocket a gain at maturity; buy above par and you'll take a loss. The coupon ignores both, so it only equals your return when you pay exactly par.
Say a bond carries a 5% coupon, so it pays $50 a year on its $1,000 face. If you bought it for $900, that same $50 is a bigger slice of your money. If you paid $1,100, it's a smaller slice, and the $100 you overpaid vanishes when the issuer repays only $1,000 at the end. The label never moves. Your return does.
What does yield to maturity actually measure?
Yield to maturity (YTM) is the single annual rate that makes the present value of every remaining coupon plus the face value equal to the bond's current price. It bundles three things the coupon leaves out: the income stream, the difference between purchase price and face value, and the years left until maturity. That's why it's the standard number for comparing bonds.
How do discount and premium bonds change the yield?
A discount bond trades below par, so you pay less and still collect the full coupon plus a gain at maturity — your yield beats the coupon. A premium bond trades above par, so you pay extra that erodes to zero by maturity, dragging your yield below the coupon. The direction of that price gap decides whether YTM lands above or below the rate printed on the bond.
The same 5% coupon bond makes the point. At $900, the $50 coupon is a 5.6% current yield, and the $100 pull toward par lifts the YTM to roughly 6.3%. At $1,100, the coupon is a 4.5% current yield, and the $100 you'll lose drops the YTM to about 3.8%. One coupon, three different returns, set entirely by price.
| Measure | Discount bond ($900) | Par bond ($1,000) | Premium bond ($1,100) |
|---|---|---|---|
| Coupon rate | 5.00% | 5.00% | 5.00% |
| Current yield | 5.56% | 5.00% | 4.55% |
| Yield to maturity | 6.32% | 5.00% | 3.81% |
| Ordering | coupon < current < YTM | all equal | coupon > current > YTM |
Why do price and yield move in opposite directions?
Because the coupon dollars are locked. When a bond's price rises, that fixed payment becomes a smaller percentage of the larger amount you paid, so the yield falls. When the price drops, the yield climbs. This inverse link is the whole reason bond prices fall when interest rates rise — new bonds pay more, so older, lower-coupon bonds have to get cheaper to stay competitive.
Picture a bond issued at a 5% coupon when market rates were 5%. If rates climb toward the roughly 4.6% area the 10-year Treasury sat near in mid-2026, or higher, buyers won't pay full par for that older bond. Its price slides until its YTM matches the going rate, and it turns into a discount bond. Fall the other way and the same bond gets bid up to a premium.
How does the price drift toward face value over time?
Whatever you paid, the issuer repays exactly face value at maturity. So a bond bought below par drifts upward toward face value as maturity approaches, and one bought above par drifts down. This "pull to par" is the built-in gain or loss that YTM captures and current yield ignores completely. The closer to maturity, the stronger the pull.
- Note the gap — a $900 price on a $1,000 bond is a $100 gain waiting at maturity; a $1,100 price is a $100 loss.
- Spread it across the years — over 10 years, that $100 is about $10 a year of extra return or drag, on top of the coupon.
- Add it to the coupon income — $50 coupon plus $10 pull on the discount bond is roughly $60 of annual return against a $950 average investment.
- Read the result — that's the ~6.3% YTM, well above the 5% coupon, and the number current yield never sees.
What is YTM's blind spot?
To actually earn the quoted YTM, you have to reinvest every coupon at that same rate until maturity. That's the reinvestment assumption baked into the number. Spend the coupons, or reinvest them at a lower rate than the YTM, and your real return lands below the figure you were quoted. It's a promise with a condition attached.
There's an academic wrinkle worth knowing: some argue reinvestment isn't strictly an assumption of the math, since YTM is just the rate that discounts the cash flows back to today's price. Fair enough as bookkeeping. But as a forecast of what you'll walk away with, the caveat stands. The clean exception is a zero-coupon bond, which has no coupons to reinvest, so its quoted yield is locked if you hold it to maturity.
When is current yield good enough?
Current yield — annual coupon divided by current price — is a fast read on the income a bond throws off relative to what it costs today. For a quick "what does this pay me right now" glance it's fine. But it stops at income. It ignores the maturity gain or loss and the time left, so it overstates a discount bond's return and understates a premium bond's. Use it as a shortcut, not a verdict.
For any real comparison between bonds, YTM is the number that puts them on equal footing, because it accounts for price, coupons, and the pull to par at once. Since YTM is really a discount rate applied to future cash flows, working through a present value calculation is a useful way to see where the figure comes from before you trust it.
Frequently asked questions
Is yield to maturity the same as the coupon rate?
Only when the bond trades at exactly par. Below par the YTM is higher than the coupon; above par it's lower. The coupon is fixed to face value, while YTM measures your return against the price you actually paid.
Can yield to maturity be negative?
Yes. A deeply premium bond bought when interest rates are very low can carry a negative YTM, meaning you'll get back less than you paid even after collecting every coupon. It's rare, but it happened widely across European government bonds in the late 2010s.
Why do bond prices fall when interest rates rise?
A bond's coupon is fixed. When new bonds start paying more, an older lower-coupon bond has to get cheaper to attract buyers, so its price drops until its YTM matches the new market rate. Price and yield always move in opposite directions.
Do I have to reinvest coupons to earn the YTM?
To realize the exact quoted YTM, yes — at the YTM rate itself. If you spend the coupons or reinvest them at a lower rate, your actual return comes in below the quoted figure. Zero-coupon bonds sidestep this because there are no coupons to reinvest.
What happens to YTM if I sell before maturity?
You no longer earn the YTM. You earn a return based on your sale price, which depends on where rates and the bond's price sit that day. The pull-to-par gain or loss may be only partly realized, so the outcome can land above or below the original YTM.
Is a higher yield to maturity always better?
Not on its own. A high YTM often signals more risk — a shaky issuer, or a price marked down for a reason. Compare bonds of similar credit quality and maturity before treating a bigger YTM as a better deal.
Which number should I compare across bonds?
Yield to maturity. Coupon rate and current yield each miss part of the picture, while YTM folds in price, coupons, time, and the maturity gain or loss. It's the one figure that puts two different bonds on the same footing.
Once the price gap and the pull to par click into place, the coupon stops looking like your return and starts looking like just one input. Enter a bond's price, coupon, face value, and maturity into the Yield to Maturity Calculator to see the exact YTM, the current yield, and how the price you pay reshapes what you actually earn.