Finance term
Yield to Maturity (YTM)
Also known as: YTM, yield to maturity, bond yield
Definition
Yield to Maturity (YTM) is the total annualized return an investor earns if a bond is purchased today and held until maturity, assuming all coupon payments are reinvested at the same rate. YTM is the standard metric for comparing fixed-income instruments and underlies the pricing of long-term business loans tied to Treasury benchmarks.
Detailed explanation
YTM accounts for three components of bond return: coupon payments, the difference between current price and face value (discount or premium), and time to maturity. When a bond trades below par (at a discount), YTM > coupon rate; when it trades above par (at a premium), YTM < coupon rate.
## Formula and Calculation YTM solves for the discount rate (r) that makes the present value of all future cash flows (coupons + par at maturity) equal to the current market price. This requires iterative calculation (or a financial calculator). Approximate YTM: [(Annual Coupon + (Face Value - Price) / Years to Maturity)] / [(Face Value + Price) / 2].
## Relevance to Business Lending The [U.S. Treasury's daily yield curve](https://home.treasury.gov/resource-center/data-chart-center/interest-rates/) provides the risk-free YTMs for maturities 1 month through 30 years. Business loan rates are priced as YTM spreads above the comparable-maturity Treasury: a 10-year business term loan at 7.5% with the 10-year Treasury at 4.5% implies a 300bps credit spread. SBA 504 debenture rates are directly tied to Treasury bond YTMs via the CDC debenture issuance process.
## YTM vs Current Yield Current yield = Annual Coupon / Current Price (ignores capital gain/loss at maturity). YTM is more comprehensive — it includes price appreciation or depreciation. For premium or discount bonds, these differ meaningfully. Lenders and investors always quote YTM for total-return comparisons.
The [Federal Reserve's H.15 release](https://www.federalreserve.gov/releases/h15/) publishes constant-maturity Treasury yields (YTMs) for all tenors daily.
◈ Worked example
- Par bond: $1,000 face, $50 annual coupon, trading at $1,000 — YTM = 5.0% (equals coupon rate).
- Discount bond: $1,000 face, $50 coupon, 5 years to maturity, trading at $950 — YTM ≈ 6.1% (above coupon rate due to $50 capital gain at maturity).
- SBA 504 pricing: 20-year Treasury YTM at 4.60% + CDC debenture spread 50bps + SBA guarantee fee spread → SBA 504 effective rate ~5.5% fixed for 20 years.
Common questions
The most-asked questions about Yield to Maturity (YTM) — answered straightforwardly.
What is the difference between YTM and interest rate? +
A bond's interest rate (coupon rate) is the fixed annual payment as a percentage of face value — set at issuance and never changes. YTM is the actual return calculated from current market price. As bond prices fluctuate in the secondary market, YTM changes daily even though the coupon rate is fixed. For loans (not bonds), the stated interest rate is effectively the YTM when the loan is made at par.
Why do bond prices and yields move in opposite directions? +
When existing bond prices fall (sell-off), the fixed coupon represents a higher percentage of the lower price — so yield rises. When prices rise (rally), the fixed coupon represents a smaller percentage of the higher price — yield falls. This inverse relationship is mathematical: price and yield are different expressions of the same cash-flow valuation.
How does YTM affect long-term business loan rates? +
Long-term fixed-rate business loans (SBA 504, 10-year term loans) are priced off comparable Treasury YTMs plus a credit spread. When 10-year Treasury YTM rises from 4.0% to 4.5%, fixed-rate 10-year business loans rise by approximately the same amount. This is why monitoring Treasury yield movements matters for businesses planning capital-intensive acquisitions or real estate purchases.
Further reading
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