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

A bond yield to maturity is the internal rate of return (IRR) of an investment in a bond if the investor holds the bond until maturity.

How to calculate the YTM of a bond?

The yield to maturity of a bond is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond.

What is a bond price?

A bond's price is what investors are willing to pay for an existing bond. Bond prices are expressed in terms of percentage of face (par) value.

What is the relationship between bond price and yield?

Price and yield are inversely related: as the price of a bond goes up, its yield goes down, and vice versa.

What is the relationship between bond price and interest rates?

Price and interest rates are also inversely related: as the interest rates goes up, the bond price will usually decrease, and vice versa. Indeed investors will be willing to pay a premium for a bond with a higher coupon rate than prevailing interest rate, and will generally expect a discount for bonds whose coupon rate is lower than prevailing interest rates. Other factors may also affect the price of a bond, such as the issuer’s reputation and rating.

About yields

Yield is a general term relating to the return on the capital you invest in a bond. There are several bond yields to consider when calculating the potential return: coupon yield, current yield, yield-to-maturity, yield-to-call and yield-to-worst.

Coupon yield is the annual interest rate established when the bond is issued. It's the same as the coupon rate.

Current yield is the bond's coupon yield divided by its market price.

A bond return calculator will allow you to calculate yield to maturity (YTM) and yield to call (YTC) which takes into account the impact on a bond's yield if it is called prior to maturity.

The yield to worst (YTW) will be the lowest of the YTM and YTC. It is the most conservative potential return a bond will give you.

The bond yield calculator on this page calculates the yield to maturity (YTM) of a bond based on its ISIN (International Securities Identification Number).

AU3CB0198034 - BEI 5% 22/08/2022 Yield