A bond’s coupon tells you the interest payment written into its terms. Its yield tells you something about that payment relative to the price and cash flows an investor receives. Those numbers can differ substantially.
Consider a bond promising $40 a year and repayment of $1,000 in five years. One investor buys it for $1,000. Another later buys the same promised payments for $900. They receive the same annual coupon, but they have not made the same investment: the second paid less and, if the issuer pays in full, also receives more principal than the purchase cost.
That difference explains why a broker can display a 4% coupon, a 4.44% current yield and a yield to maturity above 6% on one security. None of those percentages should be substituted blindly for your eventual total return.
Reviewed September 2026. All prices and yields below are hypothetical, calculated for an ordinary fixed-rate, non-callable bond unless otherwise stated. They are not current market quotes. Explore related concepts in the Knowledge hub.
What is bond yield?
Bond yield is a return measure expressed relative to a bond’s price and specified cash flows. The meaning depends on the convention: current yield focuses on annual coupon income, while yield to maturity incorporates the timing of coupons and repayment of principal.
Yield to call instead considers a specified early redemption date and price. Yield to worst usually compares the relevant contractual redemption scenarios and identifies the lowest quoted yield. These measures answer related but distinct questions.
FINRA’s bond-yield guide explains the different measures. Before interpreting any number on a brokerage screen, identify its label, calculation convention, price basis and assumptions.
Start with the bond’s promised cash flows
Our worked example has a $1,000 face value, a fixed 4% annual coupon and exactly five years remaining. It pays once per year. We value it immediately after a coupon date, so the example contains no accrued interest.
The scheduled payments are $40 at the end of years one through four and $1,040 at the end of year five. The final amount consists of the last $40 coupon plus repayment of the $1,000 principal.
This simplified annual-payment bond is not a particular Treasury security. U.S. Treasury notes and bonds normally pay interest every six months; TreasuryDirect explains their pricing conventions. Payment frequency matters when converting periodic yields into annual figures.
| Year | Coupon | Principal |
|---|---|---|
| 1 | $40 | $0 |
| 2 | $40 | $0 |
| 3 | $40 | $0 |
| 4 | $40 | $0 |
| 5 | $40 | $1,000 |
Hypothetical annual-payment bond. Final total payment is $1,040. All payments depend on the issuer meeting its obligations.
Coupon rate: the payment relative to face value
Coupon rate = Annual coupon payment ÷ Face value.
For our bond, $40 divided by $1,000 equals 4%. If its market price changes to $900 or $1,100, the fixed contractual coupon remains $40 a year. The coupon rate is still 4%.
A high coupon is not automatically an attractive investment. A buyer may have to pay a large premium to obtain those payments. Conversely, a low-coupon bond can offer a competitive yield when purchased at a sufficiently low price.
For an investor funding annual expenses, coupon dollars matter because they affect the timing of cash received. But selecting the highest coupon without examining price can confuse income timing with economic return.
Current yield: income relative to today’s price
Current yield = Annual coupon payment ÷ Current market price.
At a $900 price, our bond’s current yield is $40 ÷ $900 = 4.44%, rounded. At $1,000 it is 4%. At $1,100 it is about 3.64%.
This measure is easy to understand, but incomplete. It excludes the difference between your purchase price and principal repaid at maturity. It also does not capture when those future payments arrive.
The limitation is especially obvious for a zero-coupon bond. Such a bond pays no periodic coupon and therefore has a current yield of zero, yet buying it below its eventual repayment amount can still produce a positive return if it pays as promised.
Yield to maturity: solve for the discount rate
Yield to maturity, or YTM, is the discount rate that makes the present value of the bond’s promised payments equal its purchase price. It is an internal rate of return calculated from those contractual cash flows.
For our annual-payment bond, the pricing equation is:
Price = $40/(1+y) + $40/(1+y)2 + $40/(1+y)3 + $40/(1+y)4 + $1,040/(1+y)5.
The unknown y is the annual YTM. At a $1,000 price, y equals 4%. At a $900 price, solving the equation gives approximately 6.40%. That exceeds current yield because the buyer is also promised $100 more principal at maturity than the original purchase cost.
A calculator normally solves this equation numerically. Dividing the $100 discount by five and adding it mechanically to the coupon gives only a rough estimate, because the investment’s time value also matters.
Why a bond’s price falls when its required yield rises
Imagine comparable new investments begin offering a higher yield, while our bond still promises the same $40 annual coupons. An investor will not usually pay the same price for the older payment stream if a similar risk now commands better compensation elsewhere.
The adjustment occurs through price. A lower price increases the return available from the fixed coupons and principal repayment. If required yields fall, the existing promised payments become more valuable and the price rises.
This is the inverse price-yield relationship for an ordinary fixed-rate bond with unchanged expected payments. The SEC’s interest-rate-risk bulletin discusses this mechanism. Securities with floating coupons or embedded options require additional analysis.
Higher required yields, lower bond prices
The chart reprices the same five-year bond at different annual yields. Nothing about the promised $40 coupons or $1,000 principal changes. Only the rate used to discount those payments changes. The values are theoretical prices under the stated assumptions, not executable quotes.
A higher yield can be a warning
Required yields can rise because benchmark interest rates increase. They can also rise because investors become less confident about the issuer, demand compensation for illiquidity or expect other adverse changes.
Suppose two companies promise the same payment dates and amounts. If one has a fragile balance sheet, the lower market price may reflect a real possibility of receiving less than the promised cash flows. Quoting its YTM as though it were a guaranteed annual gain would ignore precisely the risk driving that yield.
YTM uses contractual payments. Expected return considers possible outcomes, including default, recovery amounts and their timing. A double-digit quoted yield can coexist with an unattractive expected result.
Coupon rate, current yield and YTM side by side
| Price | Current yield | YTM |
|---|---|---|
| $900 | 4.44% | 6.40% |
| $1,000 | 4.00% | 4.00% |
| $1,100 | 3.64% | 1.89% |
Coupon rate stays 4% in all three cases. YTM calculated for the five-year annual-payment example, excluding fees and taxes.
At par, the three measures coincide for this ordinary bond under consistent conventions. Below par, YTM exceeds current yield, which exceeds the coupon rate. Above par, the ordering reverses.
The discount buyer benefits from receiving principal above the purchase price if the bond pays fully. The premium buyer receives less principal than was paid for the bond, offsetting some coupon income. The size and timing of that difference help explain why price must be included.
Does YTM assume coupon reinvestment?
Two statements often become tangled here. First, YTM is the internal rate of return on the scheduled purchase and payment cash flows. That definition can be calculated without deciding what the investor does with each coupon after receiving it.
Second, producing a terminal wealth amount that compounds the entire original investment at the quoted YTM generally requires reinvesting interim coupons at that same rate, assuming all payments occur as promised and the bond is held to maturity.
If you spend the coupons, you receive the income but do not build the same terminal reinvested balance. If you reinvest at lower rates, your compound accumulation is lower. The IRR calculation and a terminal-wealth projection are related, but they are not interchangeable questions.
Our compound-interest guide explains why the treatment of interim cash matters. Keep that treatment explicit when comparing a bond with a fund return that assumes distributions are reinvested.
What if you sell before maturity?
Your holding-period return depends on the coupons received and the sale price, relative to the purchase price. The maturity-date principal is no longer the amount you receive for selling the security.
Suppose you pay $1,000, receive one $40 coupon and sell immediately afterward for $940. Ignoring costs and tax, the one-year total return is ($40 + $940 − $1,000) ÷ $1,000 = −2%. A positive coupon did not prevent a negative total return.
If the sale price were instead $1,060, the same coupon would accompany a 10% total return. These are separate hypothetical sale prices, not projections from the earlier curve. The example isolates why current income and capital movement must be combined.
Duration measures sensitivity, not a guaranteed loss
Modified duration approximates a bond’s percentage price change for a small change in yield, with other factors held constant:
Approximate price change (%) = −Modified duration × Change in yield.
Using yield changes in decimal form, a duration of seven and a 0.01 increase in yield imply approximately −7%. This is a local approximation. For larger changes, curvature in the price-yield relationship, commonly described by convexity, becomes more important.
FINRA’s duration explanation distinguishes maturity from interest-rate sensitivity. A maturity date tells you when principal is scheduled to be repaid; duration reflects the timing and value of the whole payment stream.
“I will hold to maturity” answers only part of the problem
Holding an ordinary bond to maturity can make interim sale prices less relevant if the issuer pays in full and you genuinely do not need to sell. It does not remove default risk or ensure that the coupons preserve purchasing power.
It also does not remove opportunity cost. If a better yield becomes available, the old bond still represents capital committed to its existing terms. Keeping it may be reasonable, but the fact that a loss is unrealized does not make the alternative irrelevant.
Match maturity dates to expected spending needs where appropriate. A bond intended to cover a payment in two years should not be evaluated as though the investor has unlimited flexibility to hold a much longer security through unfavorable prices.
Yield to call and yield to worst
A callable bond gives the issuer specified rights to repay early. If rates decline, the issuer may have an incentive to redeem expensive debt and refinance. The investor can lose the opportunity to keep receiving attractive coupons for as long as originally expected.
For such a bond, calculate yields using the relevant call dates and redemption prices. A premium purchase can be especially sensitive because early repayment may return less than the investor paid while shortening the period of high coupon receipts.
Yield to worst is useful for evaluating specified contractual redemption alternatives, but “worst” does not mean the worst possible economic outcome. It is not a default-loss estimate. An issuer failing to meet its obligations can produce a result worse than the quoted contractual yield.
Accrued interest: why the invoice exceeds the quoted price
Bonds are often quoted using a clean price that excludes interest accrued since the last coupon payment. The settlement amount, sometimes called the dirty price, adds the relevant accrued interest.
In a simplified half-year coupon period with a $20 coupon, buying halfway through might require roughly $10 of accrued interest in addition to the clean price. The exact amount depends on settlement dates and the security’s day-count convention.
The next $20 coupon is therefore not all newly earned income for the buyer. Part compensates for interest economically accrued before the purchase. Use actual settlement cash flows when calculating returns rather than treating clean price as the entire amount invested.
Bond funds: the displayed yield is not a maturity promise
A conventional bond fund holds a changing portfolio and may continually replace maturing securities. Its shares do not usually have the same fixed repayment date as a single ordinary bond.
A fund’s weighted portfolio YTM, distribution yield and standardized income yield can therefore describe different things. Look at the precise definition and measurement date. A distribution rate may reflect past income or other components, while portfolio yields can change as holdings and prices change.
Target-maturity funds follow a different design and should be assessed under their own terms. Do not infer a guaranteed redemption amount merely because a year appears in a product’s name. For portfolio context, see Asset Allocation Explained.
Nominal yield is not purchasing-power growth
Suppose an investment delivers an actual nominal annual return of 5% while inflation over the same period is 3%. The corresponding real return is 1.05 ÷ 1.03 − 1 ≈ 1.94%, before tax.
This calculation uses realized return, not merely a quoted bond yield. For a future investment decision, both the eventual return and future inflation are uncertain. Subtracting an inflation forecast from YTM is a rough scenario, not a locked-in real result.
Currency can add another layer. A bond paying in dollars may expose a euro-based investor to exchange-rate movements that exceed the coupon. Hedging changes the exposure and introduces its own costs and terms.
Read a bond quote in a consistent order
- Identify the issuer, currency and seniority.
- Read maturity, coupon frequency and call provisions.
- Check whether the price is a bid, an ask or an indicative quote.
- Separate clean price from accrued interest and transaction charges.
- Identify which yield convention is displayed.
- Compare credit risk, duration and liquidity with alternatives.
- Model selling early as well as holding through maturity.
- Consider tax, inflation and currency relative to the money’s purpose.
A higher quoted yield is only useful when compared with the obligations and risks needed to obtain it. The same discipline applies to equities: a high dividend yield is also a starting point for investigation, rather than a complete investment argument.
Bond yield FAQ
Why is my bond’s yield higher than its coupon?
The market price may be below face value. Current yield then rises because the coupon is divided by a lower purchase price, while YTM also includes the promised increase from purchase price to principal repayment.
Can a bond have a negative return with a positive yield?
Yes. An early sale at a sufficiently low price, default losses or relevant costs can outweigh coupon income. Quoted yield is not a guarantee of your holding-period return.
Is yield to worst the maximum possible loss?
No. It is a yield comparison across specified contractual repayment scenarios. It does not capture every possible default, liquidity or forced-sale outcome.
Are longer bonds always riskier?
Longer fixed-payment streams often have greater rate sensitivity, all else equal. Overall risk also depends on coupons, credit quality, options, currency and the investor’s holding needs.
Follow the cash flows behind the percentage
The coupon identifies a payment rule. Current yield compares annual coupon income with price. YTM discounts the promised payment schedule. Your realized return depends on what is actually paid, when you sell, how coupons are used and which costs apply.
For a portfolio, connect those cash flows to the spending horizon and the role assigned to bonds. A rebalancing policy then governs how that exposure is maintained. Understanding the percentage is useful; understanding the claims and assumptions behind it is what makes the number usable.
