How to use the Bond Yield
- Enter the face value and annual coupon rate.
- Enter the current market price.
- Enter the years remaining to maturity.
- Compare current yield with yield to maturity — they diverge whenever price differs from par.
How the calculation works
Current yield is annual coupon divided by price, a simple income measure that ignores any capital gain or loss at redemption. Yield to maturity adds that: a bond bought at a discount gains as it pulls to par, lifting YTM above the current yield, while a premium bond loses, pulling YTM below it. The approximation used adds the annualised gain or loss to the coupon and divides by the average of price and face value.
Prices and yields move inversely because the coupon is fixed: when market rates rise, existing bonds must cheapen until their yield matches. Longer maturities amplify this through duration, so a 20-year bond falls far more than a 2-year bond for the same rate move. Credit risk is the other half — a high YTM often reflects doubt about repayment rather than a bargain.
Current yield = coupon / price ; YTM ≈ [C + (F − P)/n] / [(F + P)/2]Source: Standard fixed-income current yield and approximate yield-to-maturity formulas.
Worked example
A 1,000 face bond with a 4.5% coupon trading at 928 with 7 years to maturity.
- Annual coupon = 45.
- Current yield = 45 / 928 = 4.85%.
- Annualised pull to par = (1,000 − 928)/7 = 10.29.
- YTM ≈ (45 + 10.29) / ((1,000 + 928)/2) = 5.74%.
Current yield 4.85%, yield to maturity about 5.74% thanks to the discount.
Frequently asked questions
Why do bond prices fall when rates rise?+
The coupon is fixed, so the price must drop until the yield is competitive with newly issued bonds.
Is YTM guaranteed?+
Only if you hold to maturity, the issuer does not default, and coupons are reinvested at the same yield.
What is duration?+
A measure of price sensitivity to rate changes. Higher duration means bigger price swings.
Why is a very high yield a warning?+
It usually prices in default risk. The market is discounting the chance you get repaid in full.
Last reviewed August 31, 2026. We review this page whenever the underlying formula, tax year, published rate or standard changes.