Yield to Maturity (YTM) is the total rate of return
that will have been earned by a bond when it makes all interest payments and
repays the original principal. It accounts for the time value of money and
present value of future cash flows. YTM is essentially a bond’s internal rate
of return if held to maturity. Calculation the yield to maturity can be a
complicated process, and it assumes all coupon or interest payments can be
reinvested at the same rate of return as the bond. The length of time it’s
held. YTM calculations usually don’t account for taxes paid on a bond.
The formula to calculate the YTM of a discount bond
is follows:
Where, Face value is the bond’s maturity value or
par value
Current Price is the bond’s price today.