Bonds and Yields Explained: Coupon, Current Yield and YTM

A bond represents a loan made by an investor to a borrower, typically a government or corporation. This financial instrument comes with fixed terms, including the face value that is repaid at maturity, the annual coupon rate, and the market price reflecting the cost of obtaining these payments. Yields serve as a critical metric for investors, enabling them to assess and compare bonds against each other and against stocks. As of 2026, the 10-year Treasury yield hovers between 3.5% and 4.5%, marking a significant opportunity for bond investments that have not been seen in years. Understanding key concepts like coupon rates, current yield, and yield to maturity, along with the inverse relationship between bond prices and interest rates, is essential for navigating the complexities of the bond market.

Coupon, price and the three states of a bond

The coupon rate is the interest printed on the bond: a 5% coupon on a $1,000 face value pays $50 a year, no matter what the bond trades for. But bonds rarely trade at face value. When the market rate moves, prices adjust so that old bonds compete with new ones — that adjustment is the whole story of bond investing.

Current yield vs yield to maturity

Current yield is coupon income divided by the price you pay — simple, but incomplete. Yield to maturity (YTM) is the total annualized return if you hold to maturity: coupon income plus the gain or loss as the price drifts toward face value. YTM is the number to compare across bonds, because it is apples to apples.

                Annual coupon: 5% x 1,000 = $50
Current yield: 50 / 950 = 5.26%
Price gain to maturity: (1,000 - 950) / 5 = $10 per year
Average price: (1,000 + 950) / 2 = $975
YTM ≈ (50 + 10) / 975 = 6.15%
Current yield says 5.26%; holding to maturity pays 6.15%
              

The price-rate inverse table

Prices fall when rates rise, and rise when rates fall. The table shows a 10-year bond with a 4% coupon at different market rates — the price adjusts until the total package competes with newly issued bonds. This is the single most important fact in fixed income.

Duration: why longer bonds swing more

Duration converts the inverse price-rate relationship into a number you can use. A 2-year bond has a duration near 1.9, so a 1% rate move changes its price by roughly 2%; a 30-year Treasury's duration near 17 swings 17% for the same 1% move. In the 2022 rate shock, long-duration bond funds lost more than 30% — investors who believed bonds were risk-free learned duration the hard way. Match duration to your time horizon: short bonds for short horizons, long bonds only if you will not need the money before maturity.

Reading a bond quote honestly

Check the YTM, not the coupon, when comparing bonds — the coupon ignores the price you pay. Understand the state of the bond: a discount bond pays extra via capital gain at maturity, a premium bond gives up some of its coupon. And always compare against the risk-free baseline: in 2026 a 10-year Treasury near 3.5-4.5% sets the floor, so a corporate bond must pay meaningfully more for its default risk. The real return calculator adds the final honesty check — after 3% inflation, a 4% YTM is a real return of barely 1%.