Yield to Maturity Explained: YTM, YTW and Investment Grade Bond Yields

What Is Yield to Maturity?

YTM answers the question: if I buy this bond at today’s price, hold it to maturity, and reinvest every coupon at the same yield, what annualized return will I earn? It is the internal rate of return on the bond’s promised cash flows and the standard convention on dealer quotes and brokerage platforms.

The coupon alone says little about return. A bond with a 2.00% coupon trading at 82 cents on the dollar with five years to maturity has a YTM of about 6.3% (annual payments). A bond with a 6.00% coupon trading at 108 with three years left has a YTM of about 3.2%. The market reprices bonds continuously so that their yields reflect current interest rates and credit conditions.

The YTM Formula and What Drives It

YTM is the discount rate that makes the present value of the coupons and face value equal to the price:

Price = C × [1 − (1 + YTM)⁻ⁿ] / YTM + FV / (1 + YTM)ⁿ

where C is the annual coupon, n the years to maturity, and FV the face value. The equation cannot be solved directly for YTM; it is solved iteratively with a financial calculator or a spreadsheet function (YIELD or RATE in Excel).

Four inputs drive YTM: the coupon (fixed at issuance), the price (which moves daily), the time to maturity, and the face value (usually $1,000). When interest rates rise, prices fall and yields rise; when an issuer’s credit weakens, its bond prices fall and its yields rise.

YTM vs. Coupon Rate vs. Current Yield vs. YTW

Five related yield measures appear on bond quotes, and each answers a different question.

For most investment grade corporate bonds, YTM and YTW are the two that matter. When YTW is well below YTM, the bond is callable and priced above its call price, so the market expects a call may be exercised.

Investment Grade YTM by Rating Category

The table shows the ICE BofA effective yield and option-adjusted spread for each rating category today, with high yield for comparison. Over the daily history FRED publishes, which begins October 3, 2023, the investment grade index yield has ranged from 4.67% to 6.44%; the high was on October 19, 2023. For comparison, the 10-year Treasury yields 5.24%.

ICE BofA US Corporate (AAA to BBB) and US High Yield (BB to CCC) index effective yields and option-adjusted spreads, from the Federal Reserve Bank of St. Louis (FRED), as of October 1, 2026. The range covers the daily history FRED currently publishes for these series, which begins October 3, 2023. Updated each business day.

Yields are high relative to most of the 2010s. See Credit Spreads Explained for where spreads sit relative to their history.

Worked YTM Example: A 5-Year AAA-Rated Bond

The bond trades below par because it was issued when rates were low. A buyer at $895 receives $26.25 a year and $1,000 at maturity, so the $105 difference between price and face value adds to the return.

Solving for the discount rate that equates five annual $26.25 coupons plus the $1,000 repayment to $895 gives a YTM of about 5.05%. That is far above the 2.625% coupon and reflects what a new buyer at today’s price would earn on the promised cash flows. The original buyer who paid $1,000 earns about 2.625% on those cash flows; for any holder, the realized return also depends on reinvestment, costs, taxes, and the issuer paying as promised.

This is the most common source of confusion among bond investors. The coupon is fixed at issuance. YTM is set by the market every day for new buyers: when rates rise after issuance, prices fall and new buyers’ yields rise above the coupon, and the reverse when rates fall.

The Price and Yield Relationship

Bond prices and yields move inversely. The size of the move depends on duration: long bonds move much more than short bonds for the same change in yield.

Many investment grade bonds issued in 2020 and 2021 trade below par. For example, a 10-year bond issued in 2021 with a 2.00% coupon has about five years left; at a 5.00% yield with annual payments it would trade near 87 cents on the dollar. Discount bonds have their own tax rules: for a bond bought in the secondary market below its adjusted issue price, accrued market discount is generally taxed as ordinary income when the bond matures or is sold, unless the discount is below the de minimis threshold, and bonds issued at a discount accrue original issue discount as interest each year. Consult a tax advisor before assuming a capital gains advantage. For how rating categories map to yields, see the bond ratings chart.

Yield to Worst (YTW) for Callable Bonds

Many investment grade corporate bonds are callable. Most carry make-whole calls, which require the issuer to pay the present value of the remaining payments and are rarely used to refinance; many also have a par call in the final months before maturity. A traditional fixed-price call lets the issuer redeem at a set price, often par, to refinance if rates fall, which caps the investor’s upside and forces reinvestment at lower rates.

YTW is the lowest yield across every possible call date and maturity. When a callable bond trades above its call price, the call limits how high the price can go, so YTW is the figure to use.

How YTM Compares to NNN Real Estate Cap Rates

A tenant’s bonds and a net lease property leased to the same brand are not automatically the same credit. The bond is an obligation of the issuing entity; the lease is an obligation of whichever entity signs or guarantees it, which may be a subsidiary or franchisee, with different priority and recovery in a default. With that caveat, comparing a bond yield with a cap rate (annual rent divided by price) shows how much extra current yield the real estate offers. The table uses the bond index yield for each tenant’s rating category, not a specific bond’s YTM, against the median asking cap rate on the tenant’s active listings.

Showing 5 tenants. Index yield is the ICE BofA effective yield index for the tenant’s rating category (US Corporate AAA, AA, A or BBB index; US High Yield BB, single-B or CCC and lower index), using the S&P rating, or the Moody’s equivalent where S&P does not rate, from the Federal Reserve Bank of St. Louis (FRED), as of October 1, 2026. It is an index average, not a quote on the company’s own bonds. Median asking cap rate is the median of asking cap rates (stated, or computed from stated income and price when no rate is stated) on active listings InvestmentGrade.com tracks, listings last observed October 19, 2026; asking cap rates are not closed-sale cap rates. Spread is the median asking cap rate minus the index yield. Ratings are the agency ratings in our ratings database for the entity shown; the rating type (for example issuer, senior unsecured debt, long-term debt or revenue bond ratings) varies by company. The entity that signs or guarantees a given lease can differ, so confirm the lease obligor. Shaded rows are below investment grade. NR means the agency does not rate the entity; n/a means no verified rating is on file.

The spread ranges from negative for McDonald’s, where many listings are ground leases, to positive for Dollar General. Real estate is illiquid and carries property and lease risk; it also offers depreciation of the building, 1031 exchange deferral, and capital gains treatment on a sale, subject to depreciation recapture.

What Moves YTM

Treasury yields. Investment grade corporate yields rise and fall with Treasury yields when spreads are unchanged. The 10-year Treasury yield rose about 240 basis points during 2022, and corporate yields rose with it. Today it is 5.24%, +112 bps from a year earlier.

Credit spreads. The spread is the extra yield over Treasuries for credit risk. It narrows when investors are confident and widens in stress. The investment grade index spread is 86 bps today against a range of 73 bps to 133 bps since October 3, 2023.

Issuer events. A downgrade, weak earnings, or sector stress can push one issuer’s yield higher without moving the index. Watching each issuer’s rating outlook is part of managing a bond portfolio.

How Investors Should Use YTM in Practice

Start with YTM, then check three things: where the issuer sits relative to the BBB‑/Baa3 cutoff, whether the yield comes mainly from Treasury rates or from the issuer’s own spread, and whether the same company’s credit is available on better terms elsewhere, including net lease real estate. A given YTM on a stable BBB issuer means something different from the same YTM on an issuer one downgrade from high yield.

YTM Frequently Asked Questions

Related Bond Research

• Investment Grade Bonds Hub
• What Investment Grade Actually Means
• Corporate Bond ETFs Compared
• Investment Grade Municipal Bonds
• Bond Duration and Interest Rate Risk
• Bond Ratings Chart
• Credit Spreads Explained
• Investment Grade vs. High Yield Bonds
• Investment Grade Credit Tenant Ratings

Data: ICE BofA index yields and spreads and Treasury yields from the Federal Reserve Bank of St. Louis (FRED), updated each business day. Worked examples assume annual coupon payments.