This is the total annual rate of return on a fixed income security that takes into account income and any capital gain or loss arising before it matures.
Let’s say a 5% bond trading at £105 has a remaining life of 5 years until maturity. We could estimate the annual yield to maturity as the £5 coupon, adjusted for an average annual £1 capital loss of £1 between now and maturity (all bonds are redeemed at their nominal value of £100 and this one is currently priced at £105) as a percentage of the current price. So that’s ((£5/105) x 100%) – ((£1/£105) x 100%) or about 3.8%. Other calculation methods will give a slightly different result. This 3.8% is also known as the “gross” YTM as it ignores income tax. When income tax is deducted the gross yield is quoted “net”.