Yield to maturity (YTM) is the single discount rate that makes the present value of all future coupon payments and the face-value repayment equal to the bond's current market price. It is the internal rate of return of holding the bond to maturity.
Why YTM differs from the coupon rate. If you buy a bond at a discount (below par), you earn the coupon income plus a capital gain when par is repaid — pushing YTM above the coupon rate. Buy at a premium and YTM falls below the coupon rate because you pay more than you receive back.
Current yield vs YTM. Current yield = annual coupon ÷ price. It ignores the pull-to-par effect and therefore overstates YTM for premium bonds and understates it for discount bonds. YTM is the more complete measure.
Reinvestment assumption. YTM assumes all coupon payments are reinvested at the same YTM rate. In practice, reinvestment rates vary, so realized yield may differ. Bonds with higher coupon rates are more exposed to this reinvestment risk.
Interest rate risk. Bond prices move inversely to interest rates. A rising-rate environment causes existing bond prices to fall. Longer maturities have higher duration and therefore greater price sensitivity per basis point of yield change.
Tax treatment. For bonds bought at a discount, the IRS generally requires you to accrete the discount into taxable income annually ("original issue discount" rules apply to OID bonds; market discount rules apply to bonds acquired at a discount in the secondary market). Consult a tax advisor for bonds with significant price differences from par.