Yield to Maturity (YTM)
The total annual return a note buyer earns if the note is held to the end of its term — the target return that determines the price they pay.
Yield to maturity (YTM) is the total annual return an investor earns on a note if they hold it to the end of its term, accounting for both the interest payments and the discount they paid below face value. It is the number a note buyer is really solving for: rather than asking "what price should I pay?", a buyer asks "what yield do I need?" — and the price falls out of that target. Understanding YTM demystifies why notes sell at a discount and how the offer on your note is built.
Yield vs. note rate
The note rate is what the borrower pays on the balance. The yield is what the buyer earns on the price they pay. Because notes are purchased below the balance, the buyer's yield is higher than the note rate:
- An 8% note bought at par would yield 8%.
- The same 8% note bought at a discount might yield 10%–12%.
The discount is the lever that turns the borrower's note rate into the buyer's required yield.
How YTM sets the price
Pricing a performing note is a present-value calculation. The buyer:
- Lists the remaining scheduled payments (and any balloon) from the amortization schedule.
- Chooses a target yield (the discount rate) based on the note's risk.
- Computes the present value of those payments at that yield — that present value is the price.
The formula is: Price = pmt × (1 − (1+i)^−n) / i + balloon ÷ (1+i)^n, where i is the monthly yield (annual yield ÷ 12) and n is the number of payments remaining. Raise the required yield and the price falls; lower it and the price rises. Our note value calculator shows an estimated offer range across yields of roughly 9%–12% so you can see this relationship directly.
What sets the required yield
A buyer demands a higher yield (lower price) for more risk and a lower yield (higher price) for less:
- Weak seasoning or spotty payment history → higher yield
- High LTV/ITV, junior lien → higher yield
- Slow-foreclosure (judicial) state → higher yield
- A strong borrower, low LTV, first lien, fast-foreclosure state → lower yield
YTM vs. IRR
For a held-to-maturity, fixed-payment note, YTM and the internal rate of return (IRR) are essentially the same idea — the annualized return that sets the present value of cash flows equal to the price. IRR is the more general term used when payments are irregular (early payoff, partial purchase reversions, or workouts).
What it means when you sell
You cannot change the math, but you can influence the required yield. Anything that lowers the buyer's risk — documented seasoning, a fair note rate, low LTV, first-lien position, clean paperwork — lowers the yield they need and raises your price toward face value. That is the practical takeaway of yield to maturity for a note seller.