Understanding bond yields helps you evaluate fixed income investments accurately. This calculator computes current yield and yield to maturity (YTM) so you can compare bonds and make informed investment decisions.
How This Calculator Works
This calculator analyzes bond returns:
- Face Value (Par): The bond's value at maturity (typically $1,000)
- Current Price: What the bond trades for today
- Coupon Rate: Annual interest payment as percentage of face value
- Years to Maturity: Time until the bond matures
- Current Yield: Annual coupon divided by current price
- Yield to Maturity: Total return if held to maturity
The Formula Explained
Current Yield = (Annual Coupon / Current Price) × 100
YTM ≈ [Coupon + (Face - Price)/Years] / [(Face + Price)/2]
YTM is more comprehensive—it accounts for the capital gain or loss when the bond matures at face value.
Step-by-Step Example
Analyzing a Corporate Bond
| Bond Details | Value |
| Face Value | $1,000 |
| Coupon Rate | 5% ($50/year) |
| Current Price | $920 |
| Years to Maturity | 8 |
| Yield Measure | Result |
| Current Yield | 5.43% ($50/$920) |
| Yield to Maturity | 6.3% (includes $80 capital gain) |
The bond is trading at a discount, boosting YTM above the coupon rate.
Frequently Asked Questions
What is bond yield and why does it matter?
Bond yield measures the return you earn from a bond investment. Unlike stocks, bonds have fixed coupon payments. But because bond prices fluctuate, the actual yield varies. Understanding yield helps you compare bonds fairly and calculate your expected return.
What's the difference between current yield and yield to maturity?
Current yield = annual coupon ÷ current price (simple, ignores maturity). Yield to maturity (YTM) = total return if held to maturity, including coupon payments AND the difference between purchase price and face value. YTM is more accurate for investment decisions.
Why do bond prices and yields move inversely?
When interest rates rise, new bonds offer higher coupons. Existing lower-coupon bonds become less attractive, so their prices fall until their yield matches the market. Conversely, when rates fall, existing higher-coupon bonds become valuable, and prices rise. Price and yield always move opposite directions.
What is a bond trading at a discount or premium?
Discount: Price below face value (yield higher than coupon rate). Premium: Price above face value (yield lower than coupon rate). Bonds trade at discounts when market rates exceed their coupon rate, and premiums when market rates are below their coupon.
What affects bond yields?
Key factors: (1) Interest rates (Federal Reserve policy), (2) Credit quality (higher risk = higher yield), (3) Time to maturity (longer usually means higher yield), (4) Inflation expectations, (5) Overall economic conditions. Government bonds yield less than corporate bonds due to lower risk.
How do I compare bonds with different maturities?
Use yield to maturity (YTM) as the standardizing measure. YTM converts different coupon rates, prices, and maturities into a single comparable annual return figure. A 5-year bond at 4% YTM and 10-year bond at 5% YTM can be directly compared.
What is the yield curve and why does it matter?
The yield curve plots yields across different maturities. Normally, longer maturities have higher yields (upward sloping). An inverted yield curve (short-term higher than long-term) often predicts recession. The curve's shape affects investment strategy and economic forecasting.
Should I invest in individual bonds or bond funds?
Individual bonds provide known maturity dates and exact income; you control when to sell. Bond funds provide diversification and professional management but have no maturity date—prices fluctuate. For reliable income and principal return at specific dates, individual bonds may be preferable.
Key Points to Remember
- YTM > Current Yield: Use YTM for investment decisions
- Price-Yield inverse: When one goes up, the other goes down
- Credit risk matters: Higher yield often means higher risk
- Duration risk: Longer-term bonds are more price-sensitive to rate changes
- Reinvestment risk: YTM assumes coupons reinvested at the same rate