YTM is a complex calculation but it is the most accurate measure of a bond’s overall return. It accounts for the bond’s current market price, its par value, the coupon interest rate, and the time to maturity. It assumes that all coupon payments are reinvested at the same rate as the current yield.
Why It Matters
Because YTM standardizes the return of different bonds with varying prices, coupon rates, and maturity dates, it allows investors to fairly compare the potential returns of various fixed-income investments.