Yield to maturity
When someone purchases a bond, he lends money to the issuer.
If all goes well and the issuer does not default, the buyer of the bond is reimbursed 100% of the principal at maturity.
However the purchase price of a bond may be less than or greater than 100%.
Take, for example, a 3-year bond with a face value of USD 100, that pays a 3% coupon and is issued at 95%. the buyer (borrower) pays USD 95 to buy the bond, but will be reimbursed USD 100 in two years. He will also receive 3% interest on the face value the lender (USD 3).
Thus the YTM would be calculated as follows: