Three yields worth distinguishing
The coupon rate is fixed at issue and applies to face value. Current yield divides the annual coupon by the price you actually paid, which reflects income but ignores redemption. Yield to maturity includes both the coupons and the difference between price and face value returned at maturity, which makes it the figure to compare across bonds.
A bond with a 7% coupon bought at 950 against a 1,000 face value yields about 7.4% current and roughly 8.2% to maturity, because you also collect the 50 difference at redemption.
Why prices move inversely to rates
When market interest rates rise, existing bonds paying older lower coupons become less attractive, so their prices fall until their yield matches the new market rate. When rates fall, existing bonds rise in price. Longer maturities swing more, because the outdated coupon is locked in for longer.
This calculator uses the standard approximation formula, which is accurate within a few basis points for typical bonds and far easier to reason about than the exact iterative solution.
Frequently asked questions
How accurate is the approximation?
The approximation formula is typically within a few basis points of the exact YTM for standard bonds. Exact YTM requires solving iteratively and rarely changes a decision.
What is the difference between current yield and YTM?
Current yield counts only coupon income against price. YTM also includes the capital gain or loss when the bond redeems at face value, so it is the more complete measure.
Why would a bond trade below face value?
Usually because market rates have risen since issue, or the issuer's credit quality has weakened. The discount compensates buyers for the below-market coupon or extra risk.
Does YTM assume I reinvest coupons?
Yes, at the same yield. That assumption rarely holds exactly in practice, so realised returns can differ from the quoted YTM.
Is a higher yield always better?
No. Unusually high yields typically signal higher credit risk. Compare yields only between bonds of similar credit quality and maturity.
How does this handle zero-coupon bonds?
Set the coupon rate to zero. The entire return then comes from the discount between purchase price and face value.