Fixed Income · Core
Yield to Maturity
Yield to maturity is the constant discount rate that sets the bond’s dirty price equal to its remaining cash flows if held to maturity and coupons are reinvested at that same rate.
Definition
Solve P = Σ CF_t / (1+y)^{t}. YTM assumes no default, hold-to-maturity, and reinvestment at y. It is a quoting convention and a first-order carry number, not a promised return.
Why it matters
Bonds are compared in yield, not in price. Duration and DV01 come from that yield function.
Case
A 5% YTM credit bought before a downgrade. You did not earn 5%; you earned the mark and then a new, higher YTM on a worse claim.
How to read it
For callables use YTW. For default-risky names, YTM is an IRR assuming survival — pair it with spread and recovery.
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