What is Yield to Maturity (YTM)?
Yield to Maturity (YTM) is the single discount rate that makes the bond price equal to the present value of its future cash flows (coupons + principal).
In corporate finance, YTM is a market-based proxy for a bond’s IRR and a practical starting point for estimating cost of debt, plugging into WACC, benchmarking funding costs, and testing value creation under different capital structure choices.
Formula
(If you’re trying to sanity-check the time value math, this is just present value using periodic compounding—see also EAR when comparing yields across different compounding frequencies.)
Example
Assume a bond with: Price = $980, Face value (par) = $1,000, Annual coupon rate = 5%, Payments per year = 2 (semiannual), Years to maturity = 5.
Coupon per period: so the bond pays $25 every 6 months for periods, then returns $1,000 at maturity.
Solving the pricing equation gives a Yield to Maturity of about (compare to current yield), with price vs par of , so it trades at a discount (below par).
(For interest-rate sensitivity, pair YTM with Macaulay duration, modified duration, and convexity.)