How it works
Yield to maturity (YTM) is the annualized return you'd earn holding a bond to maturity — combining coupon income with any gain or loss between face value and purchase price. This uses the standard approximation formula. An exact YTM requires solving the bond's present-value equation iteratively, but the approximation is close enough for most practical purposes.
FAQ
Q. Why an approximation instead of an exact figure?
A. The exact YTM requires iteratively solving a present-value equation. The approximation simplifies this for a fast estimate that's usually very close to the real figure.
Q. Why does yield rise when the bond trades below face value?
A. Buying below face value means you get the full face amount back at maturity — that capital gain adds to the coupon income, lifting the overall yield.