Bond Yield: Read the cash flows. Understand the price.

One bond, several useful yields

A coupon rate describes scheduled interest relative to face value. Current yield divides annual coupon dollars by the purchase price. Yield to maturity solves for the discount rate that matches the price to scheduled future payments. These measures complement each other, but they should not share an unlabeled comparison column.

Begin with the question you need to answer: near-term income, a purchase comparison, or a possible early sale. The appropriate measure follows the question. A quoted YTM is not a guarantee of the return your account will ultimately realize.

Price and yield move together—in opposite directions

For fixed promised cash flows, paying a higher price leaves a lower yield available to a new buyer. A lower purchase price raises the calculated yield, but may also reflect a change in perceived repayment or market risk. A larger percentage does not explain why the price changed.

In a hypothetical one-year example, paying $980 for a $1,040 final payment produces a 6.12% return before costs, taxes, and default. That arithmetic does not imply a current offer or an appropriate investment.

Put duration beside the quote

Duration provides an approximate measure of price sensitivity to yield changes. A duration of five suggests roughly a 5% price decline for a one-percentage-point yield increase, using a first-order approximation. Convexity, changing cash flows, and other market effects can change the actual result.

An investment can have low default risk and meaningful rate sensitivity. It can also have short duration and substantial credit risk. Keep those dimensions separate, especially when the money may be needed before contractual maturity.

Build a comparison that matches your horizon

Record the issuer, security identifier, settlement date, price convention, fees, maturity, and any call schedule. Compare similar credit exposure and duration before interpreting a small yield difference. An intended sale date belongs next to the contractual maturity date, not in a footnote.

For callable securities, inspect yield to call and yield to worst as well as YTM. Yield to worst is a contractual scenario measure excluding default; it is not a limit on all possible losses. Our bond comparison worksheet turns these checks into a readable sequence.

Put the guide to work

Start with the full bond yield article, then use the related practical resource to record the assumptions that matter. The methodology keeps the calculations consistent, while the comparison framework keeps different risks visible.

Common questions