Bond yield and yield to maturity
Also called Current yield, YTM
The return a bond provides relative to its price, measured either as income alone (current yield) or as the total return if held to maturity (YTM).
What it means
A bond’s coupon rate is fixed when it is issued, but its market price changes, so its yield changes too. Current yield divides the annual coupon by today’s price. Yield to maturity (YTM) goes further: it is the single annual rate that accounts for every remaining coupon plus the gain or loss between today’s price and the face value repaid at maturity, assuming all payments are made and coupons are reinvested at that same rate.
Bond prices and yields move in opposite directions. When market interest rates rise, existing bonds with lower coupons fall in price until their yields are competitive; when rates fall, prices rise. A bond bought below face value has a YTM above its current yield, and one bought above face value has a YTM below it.
Formula
Current yield = annual coupon ÷ bond price
- Annual coupon = the dollar interest paid per year
- Bond price = the current market price of the bond
Example
For example, a $1,000 bond with a 4% coupon pays $40 a year. If its price drops to $800, the current yield is $40 ÷ $800 = 5%, and the YTM is higher still because the buyer also gains $200 when the full $1,000 is repaid.
How it’s used
- Comparing bonds with different prices and coupons
- Judging the income a bond fund or individual bond may provide
- Understanding why bond prices fell when interest rates rose
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.