Yield to maturity
The yield to maturity is what a bond earns you each year if you hold it to the end at today’s price.
An example
A bond pays €2 a year and repays €100 in one year. Its price today is €95. Hold it to the end: you get €2 plus a €5 gain on €95. That is about 7.4% for the year, more than the 2% coupon.
Coupon and yield differ
The coupon is fixed when the bond is issued. The yield changes with the price: buy below €100 and you earn more than the coupon; above €100 and you earn less. Newspapers quote yields, not coupons.
A promise, if all goes well
The yield is what you earn only if the borrower pays every coupon and repays at the end, and you hold it that long. A high yield often means the market doubts one of those.
For a fund
A bond fund shows an average yield of what it holds. It is a fair guide to what the fund may earn over the next years, before costs, as long as rates and the borrowers stay where they are.
Key takeaways
- Yield to maturity counts the coupon and the pull back to €100.
- Price below €100 means yield above the coupon.
- A very high yield is usually a warning, not a gift.