Final answer:
Yield to maturity (YTM) is the total return expected if a bond is held until maturity, considering both the coupon payments and the face value.
Step-by-step explanation:
Yield to maturity (YTM) is a calculation that determines the total return expected on a bond if it is held until maturity. For example, if Ford Motor Company issues a five-year bond with a face value of $5,000 and an annual coupon payment of $150, the YTM would be calculated considering the coupon payments.
Essentially, the YTM is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) will equal the current price of the bond. The formula for YTM can be complex, involving iterative methods or financial calculators, as it solves for the interest rate that equates the present value of future cash flows.
Remember, the coupon rate is not the same as the bond yield, specifically the YTM, as it also accounts for the price at which the bond is purchased, whether at a discount or at a premium to the face value.