Fixed Income Technicals

Yield to maturity

Learning Outcome

5

Identify premium and discount bonds using YTM. 

4

Calculate approximate YTM.

3

Explain the relationship between bond price and YTM.

2

Understand the concept and importance of YTM.

1

Understand the concept and importance of YTM.

Face value at maturity = Final destination arrival — money returned

Coupon payments = Toll collections you receive along the way

Yield to Maturity= A complete road trip cost

Bond investment = Booking a road trip from Mumbai to Delhi

Current bond price = What you paid for the trip ticket today

Yield to Maturity (YTM) = Your TOTAL effective return per year for the entire journey

Buying at a discount = Getting the ticket cheaper — bonus return at the end

Buying at a premium = Paying more than face lower overall return

Holding to maturity = Completing the full road trip — no exit midway

What is Yield to Maturity?

Yield to Maturity is the annualised total return an investor earns if they purchase a bond at its current market price and hold it until it matures — assuming all coupon payments are received on time and reinvested at the same YTM rate.
It accounts for three sources of return:

  1. Coupon income- Regular interest payments received throughout the holding period

  2. Capital gain/loss- Difference between purchase price and face value received at maturity

  3. Reinvestment Income- Returns earned by reinvesting coupons at the same YTM rate over the period

The YTM Formula

The exact YTM requires trial and error (or a financial calculator / Excel). The widely used approximation formula is:

YTM Approximation Formula

YTM  ≈  [ C + (F - P) / n ]  ÷  [ (F + P) / 2 ]

YTM vs Coupon Rate vs Current Yield

These three yield measures are often confused. Here is how they differ:

Worked Example (Practical Approach)

Real World Connect See how this played out live — RBI cut rates in April 2025, bond YTMs across India compressed in real time.
🔗Read: https://www.indiratrade.com/blog/rbi-rate-cut-in-focus-how-bond-yields-and-investor-sentiment-are-shifting-in-april-2025/9359 

Summary

5

YTM is a key bond valuation measure.

4

Discount Bond: YTM > Coupon; Premium Bond: YTM < Coupon.

3

YTM connects bond price and cash flows.

2

It includes coupons and price gain/loss.

1

YTM is the total return if held to maturity.

Quiz

Yield to Maturity (YTM) represents:

A. Only coupon income

B. Total return earned if the bond is held till maturity

C. Dividend received from shares

D. Face value of the bond

Quiz-Answer

Yield to Maturity (YTM) represents:

A. Only coupon income

B. Total return earned if the bond is held till maturity

C. Dividend received from shares

D. Face value of the bond