Significance

• Many bonds come with an option for the issuer to pay them back in an alternate fashion instead of continuing with interest payments until the maturity date and then redeeming the bonds from the investors. One of the most common mechanisms for early redemption is a Call provision that allows the issuer to redeem the bonds at a set amount after a set period of time. If this happens, it changes the overall yield of the investment. The Yield to Maturity is the yield if the bond is held all the way to maturity and as such is considered the "basic" or "standard" yield of the bond.
  
  

Time Frame

• The Yield to Maturity (YTM) is calculated based upon the bond's maturity date and thus is the same length of time at issue as the bond's lifespan. Thus a 20 year bond would have its YTM calculated based upon 20 years at issue. A 30 year bond that is sold after 15 years would have its remaining YTM calculated based upon 15 years.
  
  

Considerations

• If a bond has alternate redemption methods, these will be made clear to the investor prior to any transaction taking place. It is important to know the YTM regardless of any possible alternate redemption because it is possible (even common) for a bond to not be redeemed prior to maturity, so the YTM is one possible yield of the investment. It is also advisable to know the yields for the other possibilities, most commonly, the Yield to Call or YTC.
  
  

Misconceptions

• Because a bond has a published interest rate, many investors mistakenly assume that this interest rate will be their yield. This is true only if the bond is purchased from the issuer or another investor at face value. If the purchase price differs from the face value (for example, a $1,000 bond is purchased for any amount except $1,000) then the actual yield of the bond will vary. It will be higher if the bond is purchased for less than the face value, and lower if purchased for more than the face value.
  
  

Function

• Calculating the YTM is a complex complication but there a many calculators available to do just that. Any price quote will usually contain the YTM (see Resources).