What does yield to maturity (YTM) indicate?

Yield to maturity (YTM) is a crucial concept in bond investment, representing the total return an investor can expect if the bond is held until it matures. This metric encompasses not only the bond's interest payments (or coupon payments) but also any capital gains or losses incurred upon maturity. The YTM is calculated based on the bond's current market price, par value, the total number of years until maturity, and the coupon payment structure.

Understanding YTM is essential for investors because it provides a single measure that reflects the bond's overall expected performance, considering the time value of money. If an investor purchases a bond at a price different from its face value, YTM gives a clearer picture of the bond's profitability over its life, rather than simply focusing on the annual interest payments.

This makes YTM a vital tool for comparing bonds with different maturities, coupon rates, and prices, enabling investors to make informed decisions in their investment strategies.