What is the difference between Coupon Rate and YTM?

The Coupon Rate is the fixed interest rate the bond pays annually based on its face value. YTM is the bond's total expected return, which varies with the market price. If you buy a bond at a discount (below face value), its YTM will be higher than the coupon rate. If you buy it at a premium (above face value), its YTM will be lower.

Is this calculator's YTM exact?

This calculator uses a widely accepted formula to approximate YTM, which is very accurate for most practical purposes. The exact YTM calculation requires complex, iterative trial-and-error methods that are typically performed by financial software.

Bond Yield to Maturity (YTM) Calculator

The Landlord's Return: Understanding YTM

Imagine buying a rental property. Its official value is $100,000, and it provides $5,000 in rent each year (a 5% yield). But what if you were able to buy it for only $95,000? Your total return changes. You still get the $5,000 rent, but you've also secured a $5,000 capital gain that you'll realize when you eventually sell it for its true value.

A bond's Yield to Maturity (YTM) works the same way. The **Coupon Rate** is like the fixed rental income. But the **YTM** is your *total* annual return, factoring in both the coupon payments and the gain (or loss) you'll make if you bought the bond for a price different from its face value. This calculator finds that total return for you.

Related Financial Planning Tools

Investment ROI Calculator: Calculate the Return on Investment for any asset, allowing you to compare a bond's YTM with returns from stocks or real estate.
Compound Interest Calculator: Understand the power of compounding, a core principle that drives long-term returns in fixed-income investments.
Simple Interest Calculator: Calculate interest earnings without the effect of compounding, useful for understanding a bond's coupon payments in isolation.

Frequently Asked Questions

What is Yield to Maturity (YTM)?

Yield to Maturity is the total anticipated rate of return for a bond if it is held until its maturity date. It's a comprehensive measure that includes all future interest (coupon) payments plus the gain or loss of the principal (the difference between the face value and the purchase price).

How is YTM different from a bond's Coupon Rate?

The Coupon Rate is the fixed percentage of interest the bond issuer pays each year based on the bond's face value. It never changes. YTM, on the other hand, is a dynamic figure that reflects the bond's total return based on its current market price. If you buy a bond for less than its face value (at a discount), your YTM will be higher than its coupon rate. If you pay more (a premium), your YTM will be lower.

Why is this an 'approximate' YTM?

This calculator uses a well-known and highly effective formula to estimate YTM. This approximation is sufficient for almost all individual investors. The precise calculation of YTM is mathematically complex and requires an iterative (trial-and-error) process to solve for the exact interest rate, which is typically handled by specialized financial software.