Yield to maturity
The yield on a bond assuming it is held to maturity and its coupons are reinvested.
Yield to maturity is the single annual rate that equates a bond's current price with all the future payments on it: the coupons and the repayment of par value on the maturity date. It answers the question of what rate the investor is actually earning on the money by buying the bond at exactly this price on exactly this day, rather than what coupon is printed in the terms of the issue.
What exactly this rate equates
The rate is found numerically, by successive approximations: there is no closed-form expression for it, so the terminal solves the equation by iteration — the same way the internal rate of return of any project is calculated. The calculation takes in the purchase price together with accrued interest, all the remaining coupons on schedule and the par value, and for amortising bonds also the partial repayments of par, which is why bond amortisation shifts the result noticeably compared with a conventional issue. The figure also depends on which day count convention is used to count the days in a period, and on the annualisation basis: simple and effective yield on one and the same bond give different numbers. Price and yield move in opposite directions, and the sensitivity of that relationship is described by duration.
How it looks in the exchange data
Among the most liquid issues of the day, yield to maturity differs not because they carry different coupons, but because of price, term and the premium for the issuer's credit risk:
To separate the contribution of risk from the contribution of the level of interest rates in the economy, the yield is compared with the government debt curve — this is the job of the G-spread and the Z-spread.
What the rate does not show
Yield to maturity is calculated before taxes and costs: the brokerage commission and the personal income tax on coupons and on the price difference are not included in it, and the base tax rate on investment income is 13%. For a floater the measure loses its meaning altogether: the future coupons there are unknown, and any value rests on the assumption that the base rate stays unchanged, so the risk of such a bond is described by floater duration, not by its calculated yield. A common mix-up is to confuse yield to maturity with current yield: the latter divides the coupon by the price and completely ignores the repayment of par, which is why the two figures diverge for bonds trading far from par.
How to read the number
This is the only correct way to compare two bonds with different coupons and maturities.