What is the total return expected on a bond if it is held until maturity?

The total return expected on a bond if it is held until maturity is best represented by Yield to Maturity (YTM). YTM is a comprehensive measure that accounts for all cash flows associated with a bond, including the periodic coupon payments as well as the difference between the bond’s purchase price and its face value at maturity. This means that YTM reflects not only the income generated from the bond but also the anticipated capital gain or loss if the bond is bought at a price different from its par value.

When investors hold a bond until maturity, they will receive the full face value (principal) in addition to the interest payments during the life of the bond. The YTM calculation integrates all of these factors to provide an annualized rate of return, assuming that all coupon payments are reinvested at the same rate. This makes YTM a crucial metric for investors considering the long-term profitability of holding a bond.

Current Yield, the Nominal Rate, and Effective Interest Rate do not provide the full picture of total expected returns when holding the bond to maturity. Current Yield focuses solely on the income aspect (coupon payment divided by price), Nominal Rate refers to the stated interest rate without adjusting for market conditions or timing of cash flows, and Effective Interest