What is Yield to Maturity (YTM)?
Yield to Maturity (YTM) represents the estimated annual return you can expect to earn if you hold an investment until it matures. In simpler terms, it's like predicting how much money you could make each year from an investment, assuming you stick with it until the end.
How is YTM Calculated?
YTM is determined using a complex formula that takes several factors into account, such as:
- Purchase price: How much you paid for the investment.
- Face value: The amount the investment will pay back at maturity.
- Interest rate: The periodic payments made to you as an investor.
- Time to maturity: How long you hold the investment before it matures.
Key Takeaways
- Higher YTM = Higher Potential Return: Typically, a higher YTM suggests a higher expected return on your investment.
- Influenced by Purchase Price: If you buy an investment at a discount (meaning you paid less than its face value), the YTM will be higher because you're effectively getting a better deal.
- YTM Reflects Risk: A higher YTM might also signal a higher risk. Be sure to consider the balance between potential return and risk when evaluating investments.
Important Note
YTM is an estimate. Your actual returns can vary based on market conditions and other factors that may change over time.