Yield to maturity (YTM) is the annual effective return that would be earned on a bond if it is held till its maturity.

Expressed as an annual percentage, the **yield** tells investors how much income they will earn each year relative to the cost of their investment.

**Formula to calculate yield to maturity.**

- C – Interest/coupon payment.
- FV – Face Value of the bond.
- PV – Present value of the bond.
- t – Number of years it takes the bond to reach maturity.

**Example:**

Assume that there is a bond on the market priced at $800 and that the bond comes with a face value of $900. The yearly coupons on this bond are $200, the bond will reach maturity in 5 years, thus, calculate the yield to maturity of the bond.

Therefore, the bond’s YTM is 25.88%.