# What is the yield to maturity?

The yield to maturity is a figure that is used for the valuation of bonds. The yield to maturity shows, which yield a investor gets, when he buys a bond at the market price, collects all interest payments and gets paid back at 100% at maturity.

# Calculate the yield to maturity

#### (yield to maturity (ytm) formula, to calculate the yield of a bond)

The yield to maturity can easily and relatively accurate be calculated with this formula:

** nominal - market-price ****YTM = interest+ remaining time to maturity in years **** (nominal + market-price) **** 2**

# Example

A bond is trading at 97.3%. The interest is 4.60% per year. The bond is due in 4.19 years.

Whats the yield to maturity?

step 1: nominal 100 - market-price 97.3 = **2.7**

step 2: **2.7** / remaining life 4.19 = **0.64**

step 3: interest 4.6 + **0.64** = 5.24

step 4: (nominal 100 + market-price 97.3)/2 = **98.65**

step 5: 5.24 / **98.65** = **0.0531**

**answer:** the yield to maturity is **0.0531**. That's 5.31%

# Use of the yield to maturity:

With the yield to maturity different bonds can be compared. **Which bond yields better?** A 5-year bond, trading at 101% with 4% coupon, or a 4-year bond, trading at 99% with 3% coupon?

**answer:** the 5-year bond has a yield to maturity of 3.78%, the 4-year bond is at 3.27%. The investor can gain transparency with the ytm and will rather buy the 5-year bond with a higher yield.