What is a bond's yield to maturity (YTM)?

A bond's yield to maturity (YTM) refers to the annual rate of return an investor can expect to earn if the bond is held until its maturity date. This metric takes into account not only the bond's current market price but also the total interest payments or coupon payments that will be received over the life of the bond and the difference between the purchase price and the face value at maturity.

YTM is crucial for investors because it provides a more comprehensive measure of a bond's potential return compared to simply looking at the annual interest payment or the bond's trading price. It reflects the total expected performance of the bond considering all cash flows, making it a valuable tool for comparing bonds with different prices, coupon rates, and maturities.

In contrast, the annual interest payment a bondholder receives solely reflects the income generated each year and does not encapsulate the total return. The price at which a bond is traded in the market indicates its current valuation but does not provide information about the investment's long-term profitability. Finally, the total interest payments received over the life of the bond do not factor in the bond's market price or the capital gain or loss realized upon maturity, making this measure incomplete for determining the overall expected return. Thus, YTM is