What is YTM in Bonds?
Jakarta, Pintu News – In the world of bond investment, one of the most important terms to understand is Yield to Maturity (YTM). This concept is very useful for investors to estimate the profit potential of the bonds they own or are considering buying. YTM is not just a number – it reflects the total return an investor can earn if the bond is held to maturity.
What is YTM in Bonds?
Yield to Maturity (YTM) is the total return that investors will get if they buy a bond and hold it until the maturity date. YTM takes into account all periodic coupon payments as well as the difference between the purchase price of the bond and the face value that will be paid at maturity.
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In other words, YTM reflects the estimated average annual income an investor will receive from the bond, including any gains or losses if the bond is purchased above or below par value.
Yield to Maturity Formula
The YTM of a bond can be calculated using the following formula:
YTM = [ C+ (FV - PV) Ă· t ] Ă· [ (FV + PV) Ă· 2 ]
Description:
- C = Annual coupon payment
- FV = Face value of the bond (Face Value)
- PV = Current bond price (Present Value)
- t = Number of years to maturity
This formula calculates the estimated average annual rate of return that an investor would earn if they bought a bond at the current market price and held it to maturity, taking into account coupon payments and the difference between the purchase price and the face value.
Example of How to Calculate YTM
Suppose you buy a bond with the following details:
- Bond price: IDR 950,000
- Face value: IDR 1,000,000
- Annual coupon: IDR 80,000
- Maturity: 3 years
Using a financial formula or calculator, you will find the YTM rate of return that equates the present value of the three coupon payments and the face value of IDR 1,000,000 to the market price of IDR 950,000.
Once calculated, the YTM value is approximately 9.5% per year.
Difference between Current Yield and YTM
Many novice investors confuse Current Yield and Yield to Maturity. Here’s a brief explanation:
| Aspects | Current Yield | Yield to Maturity (YTM) |
|---|---|---|
| Focus | Current annual coupon income | Total return to maturity |
| Formula | Annual Coupon Ă· Bond Price | Estimated total annualized return |
| Accounting for Capital Gain/Loss | No | Yes |
| Complexity | Easy to calculate | More complex |
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So, Current Yield only looks at the return from the current coupon, without taking into account the purchase price vs. the face value at maturity, while YTM gives a more complete picture of the total return potential.
Overall, understanding Yield to Maturity (YTM) is essential for anyone who wants to invest in bonds intelligently. YTM helps investors assess whether a bond’s current price is commensurate with the potential return it will receive until maturity. Compared to current yield, YTM provides a more complete and realistic picture of long-term returns.
By understanding this concept, you can make wiser investment decisions, especially when used in conjunction with risk analysis, duration, and other portfolio strategies.
FAQ
FAQ (Frequently Asked Questions)
Does YTM always reflect a certain return?
Not always. YTM is an estimate assuming that the bond will be held to maturity and all coupons are paid on time. If the bond is sold before maturity, the return may be different.
How to easily calculate YTM?
The most practical way is to use a financial calculator, Microsoft Excel ( YIELD function), or an investment platform that provides automatic YTM simulation.
Can YTM be negative?
Yes, YTM can be negative if bonds are bought at very high prices and low coupons, as has happened with negative interest rate sovereign bonds in Europe or Japan.
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Reference:
- CFI. Yield to Maturity (YTM). Accessed on November 24, 2025
- Investopedia. Yield to Maturity (YTM): What It Is and How It Works. Accessed on November 24, 2025
- WallStreetPrep. Yield to Maturity (YTM). Accessed on November 24, 2025
