Final answer:
Yield to maturity for bonds is the total expected rate of return if a bond is held to its maturity, including both coupon payments and any gains or losses when the bond is repaid at its face value. Interest rates indicated on the bond are often different from the bond yield, which adjusts with market conditions. High-yield bonds offer more significant returns but carry a higher risk of default.
Step-by-step explanation:
The yield to maturity (YTM) for bonds, also known as the expected rate of return, is the internal rate of return an investor earns if they hold the bond until its maturity date, assuming all payments are made as scheduled.
This yield incorporates not just the coupon payments but also the difference between the bond's current market price and its face value at maturity.
When buying a bond, especially one that has been on the market for some time, it's important to recognize that the interest rate indicated on the bond itself is not necessarily equivalent to the bond yield. The yield reflects current market conditions, which can change due to fluctuations in the overall interest rates in the economy.
High-yield or junk bonds offer higher returns but come with an increased risk of default, while bonds with payments based on a fixed interest rate can still carry risks, specifically interest rate risk, which occurs when overall market interest rates rise and the fixed rate of the bond becomes less attractive.