How it works
A bond pays a fixed coupon and returns the face value at maturity, and its price moves inversely with interest rates. Current yield is simple: annual coupon divided by price. Yield to maturity is the fuller number — it also accounts for the capital gain or loss of buying below or above face value, spread over the years to maturity. The engine computes both, using the standard approximation for YTM. The key relationship: when a bond's price rises above face value, its yield falls below the coupon, and vice versa — a 5% coupon bond bought at 950 yields about 5.3% currently, but its YTM is higher still, because the price rises toward 1,000 by maturity. Investors compare YTM across bonds because it is the apples-to-apples return of holding to maturity. Duration risk is the reason prices move — longer maturities swing more with rates — which is the other half of the bond lesson this calculator's maturity input teaches.
Formula
Current yield = coupon / price | YTM ≈ (coupon + (face - price)/years) / ((face + price)/2)
Tips
- Compare YTM, not coupon rate, across bonds — the coupon ignores price.
- Discount bonds (below face) pay extra via price gain; premium bonds (above face) take a loss at maturity.
- Longer maturities mean bigger price swings when rates move — match duration to your horizon.
- Municipal yields are tax-free — gross up the YTM by your tax rate before comparing to corporates.
Frequently asked questions
- What is the difference between current yield and YTM?
- Current yield is just coupon income divided by price. Yield to maturity adds the effect of buying at a discount or premium — the price drift toward face value over the remaining years. YTM is the total return if you hold to maturity; current yield is only the income piece.
- Why do bond prices fall when rates rise?
- A bond with a 5% coupon becomes less attractive when new bonds pay 6%, so its price must drop until its yield matches the market. The sensitivity is duration: longer maturities have larger price swings. That is the inverse price-yield relationship the calculator's two numbers capture.
- What is a discount bond?
- A bond trading below its face value — the market demands a higher effective yield than its coupon, so the price adjusts down. Held to maturity, it repays the full face value, producing a capital gain on top of the coupon; YTM includes both.
- Is the YTM calculation exact?
- The engine uses the standard approximation, which is accurate to a few basis points for typical bonds; the exact YTM requires solving the bond-pricing equation iteratively. For comparing candidates, the approximation is more than enough precision.