Bond YTM Calculator
Calculate bond yield to maturity for fixed income investment analysis.
What this calculator does
This calculator computes a bond's yield to maturity — the annualised return from buying at today's price and holding until redemption. It combines the coupon income received along the way with the gain or loss between what you pay and the nominal value repaid at the end.
YTM exists because the coupon rate alone says little about return once a bond trades away from par. A 3.5 percent coupon gilt bought at £92 and a 5 percent coupon bond bought at £107 can deliver nearly identical returns. Yield to maturity is the common measure that makes them comparable.
When to use it
Use it when comparing individual gilts or corporate bonds for purchase, when deciding whether a holding is worth keeping against selling at the current market price, or when checking that a broker's quoted yield matches what the price and terms actually imply.
It is also how you read the market. Comparing a corporate bond's YTM with the gilt of the same maturity gives the credit spread, the extra yield demanded for that issuer's default risk. For UK taxpayers there is a second use: because gilts are exempt from capital gains tax, comparing gross YTM against after-tax YTM often changes which gilt is genuinely best for you.
Understanding the inputs
Nominal value is the amount repaid at redemption, conventionally quoted per £100 for gilts. Purchase price is what you pay today, also quoted per £100 — a price of 92 means £92 for every £100 of nominal.
The coupon is the annual interest in pounds, so a 3.5 percent coupon on £100 nominal is £3.50. This calculator assumes annual coupons; gilts actually pay semi-annually, which lifts the effective yield slightly. Years to maturity is the time remaining, not the original term. Quoted prices are clean prices, excluding the accrued interest you also pay the seller at settlement.
How is this calculated?
The redemption yield is the discount rate at which the present value of all remaining coupons plus the redemption of nominal value equals the current market price. There is no closed-form solution, so it is solved numerically. The running yield, by contrast, is simply the annual coupon divided by the market price and ignores any gain or loss at redemption.
A worked example
Take a gilt with £100 nominal value, a 3.5 percent coupon paying £3.50 a year, seven years to redemption, trading at £92. The running yield is £3.50 divided by £92, or 3.80 percent — but that ignores the £8 gain when the gilt redeems at par.
The approximation adds the annualised gain of £1.14 to the £3.50 coupon and divides by the average of price and par, giving about 4.84 percent. Solving properly gives a YTM of roughly 4.88 percent. For a higher rate taxpayer holding outside an ISA, the picture improves further: the £8 redemption gain is free of capital gains tax, so only the £3.50 coupon is taxed.
Limitations and assumptions
The biggest assumption is reinvestment: YTM assumes every coupon is reinvested at the same yield until redemption. In a falling rate environment that will not happen, and your realised return will be lower than the quoted figure. It also assumes you hold to maturity — sell early and your return depends entirely on the price available.
The model treats coupons as annual and default as impossible, neither generally true. It cannot handle callable or puttable issues, floating rate notes, or index-linked gilts, whose real yields need an inflation assumption to interpret. It excludes tax, accrued interest, and dealer spreads, which can be wide on small retail corporate bond trades. This is not regulated financial advice.
Common Questions
- What does yield to maturity actually measure?
- The total annualised return if you buy a bond at today's price and hold it to redemption, collecting every coupon plus the nominal value at the end. It combines coupon income, the gain or loss between price and par, and the time remaining into one figure — effectively the bond's internal rate of return.
- How is YTM different from the coupon rate?
- The coupon is fixed at issue as a percentage of nominal value and never changes. YTM moves constantly with the market price. A gilt with a 3.5 percent coupon bought at £92 per £100 nominal yields well above 3.5 percent, because you also collect the £8 gain when it redeems at par.
- What is running yield and why does it differ?
- Running yield, the UK term for current yield, is the annual coupon divided by the price. It captures income but ignores the pull to par. A 3.5 percent gilt at £92 has a running yield of 3.80 percent while its YTM is about 4.88 percent. The gap is the redemption gain spread over the remaining years.
- How are gilts taxed?
- Coupon interest is taxable as savings income, though it may fall within your Personal Savings Allowance. Critically, gilts are exempt from capital gains tax, so the redemption gain on a low-coupon gilt bought at a discount is entirely tax-free. That is why low-coupon gilts trade at a premium yield-wise for higher and additional rate taxpayers.
- Why do bond prices fall when interest rates rise?
- Because a fixed coupon becomes less attractive against newly issued bonds paying more, so the price must fall until the yield matches what the market now demands. Longer-dated gilts fall harder — the 2022 gilt crisis saw long-dated issues lose a third of their value within weeks as yields spiked.
- Is the approximation formula good enough?
- For a quick check, usually. On a gilt at £92 with a 3.5 percent coupon and seven years remaining, the approximation gives 4.84 percent against a true YTM of 4.88 percent. The gap widens for bonds trading far from par or with long maturities, where iterative solving earns its keep.
- What assumption does YTM make that may not hold?
- That every coupon is reinvested at the YTM itself. If yields fall and you reinvest coupons at 3 percent rather than 4.9, your realised return falls short of the quoted figure. This is why zero-coupon and strip issues, which have no coupons to reinvest, deliver exactly their stated yield.
- How do index-linked gilts fit in?
- They do not fit this calculator. Their coupons and redemption value are uprated by RPI, so the quoted figure is a real yield rather than a nominal one and depends on future inflation. A real yield of 1 percent on an index-linked gilt is not comparable with a 4.9 percent nominal YTM without an inflation assumption.
- Does YTM tell me whether a bond is a good buy?
- Only relative to bonds of similar credit quality and maturity. A yield noticeably above comparable issues is compensation for default risk, not a bargain. Compare a corporate bond's YTM against the gilt yield for the same maturity — that spread is the market's price for the issuer's credit risk.