This percentage indicates the actual return if you decide to purchase the bond at current market price.
Yield-to-Maturity
Yield-to-Maturity refers to the total return over the life of the security. Theoretically, it implies reinvestment of the annual interest receipts at a constant rate. It is considered the most important parameter to assess the viability of a bond investment. However, the calculation for YTM is rather complex that relies on a ‘trial and error method’ or the aid of some calculating device. The concept can be expressed mathematically, as:
N (1+R)-1 + N (1+R)-2 + ….. N (1+R)-n + P (1+R)-n = M
where
C ≈ Annual Coupon Interest or Nominal Yield;
R ≈ Yield-to-Maturity;
P ≈ Par Value or Redemption Value;
n ≈ Years left for maturity;
M ≈ Price of the bond;
The three yields are equal if and only if a bond is selling at par.