yield to maturity

YTM allows investors to compare a bond's expected return with those of other securities. Understanding how yields vary with market prices (that as bond prices fall, yields rise; and as bond prices rise, yields fall) also helps investors anticipate the effects of market changes on their portfolios. Further, YTM helps investors answer questions such as whether a 10-year bond with a high yield is better than a 5-year bond with a high coupon.

Although YTM considers the three sources of potential return from a bond (coupon payments, capital gains, and reinvestment returns), some analysts consider it inappropriate to assume that the investor can reinvest the coupon payments at a rate equal to the YTM.

It is important to note that callable bonds should receive special consideration when it comes to YTM. Call provisions limit a bond's potential price appreciation because when interest rates fall, the bond's price will not go any higher than its call price. Thus, a callable bond's true yield, called the yield to call, at any given price is usually lower than its yield to maturity. As a result, investors usually consider the lower of the yield to call and the yield to maturity as the more realistic indication of the return on a callable bond.