Yield to Maturity
The total annualised return from holding a bond until it matures.
YTM assumes every coupon is reinvested at the same rate and the issuer does not default, so credit rating and liquidity should be read alongside it.
Why Yield to Maturity matters when comparing products
Yield to Maturity (YTM) is a crucial metric for Indian investors to compare various debt instruments, such as government bonds, corporate bonds, and debentures. It provides a standardised way to assess the total return potential, considering both interest payments and any capital gains/losses if held to maturity. Understanding YTM helps investors evaluate the attractiveness of different fixed-income options relative to their risk tolerance and investment horizon, aiding in informed portfolio decisions.
Illustrative example
An investor purchases a bond with a face value of ₹1,000, an annual coupon of ₹80, and three years to maturity. If the current market price is ₹980, the YTM would be the discount rate that equates the present value of all future cash flows (₹80 coupon each year for three years, plus ₹1,000 principal at maturity) to the current price of ₹980. This rate, say 8.7%, represents the annualised return.