Bonds - Yield to Maturity

DEFINITION

Yield to maturity is the most commonly used measure of value of a bond. This yield includes the compounding of interest and assumes that the bond is held until maturity.

FORMULA

Expressed mathematically, the relationship between the price P and the yield to maturity Y for a bond paying an annual coupon of R is, on a coupon date:

With:

Y = yield to maturity expressed in %.
R = coupon rate.
P = price of the bond.
M = the number of years to maturity.

The relation is:

Even if the principle is the same, the formula for bonds that pay interest at another frequency or for yield at another date than the coupon's date is more complex.

Yield to Call - Yield to Put.