Current Yield and Yield to Maturity Answer Different Questions
One tells you what a bond pays you this year. The other tells you what you will actually earn if you hold it to the end. They can differ by a lot.
Two Numbers, One Bond
A bond pays a fixed coupon, a set dollar amount each year, and returns its par value, usually 1,000 dollars, at maturity. Those terms never change once issued.
What changes is the market price. A bond issued with a 3 percent coupon when rates were 3 percent will not trade at par once rates reach 5 percent. Nobody pays full price for below market income, so the price falls until the total return is competitive.
That gap between a fixed contract and a moving price is why two yield measures exist.
Current Yield
Current yield is the annual coupon divided by the current price. A bond with a 30 dollar coupon trading at 850 has a current yield of 3.5 percent.
It answers one narrow question: what income does this cost me today. That is genuinely useful if you are living off the cash flow.
It also ignores something large. You paid 850 for something that pays back 1,000. That 150 dollars is part of your return, and current yield does not see it.
Yield to Maturity
Yield to maturity, or YTM, is the single discount rate that makes the present value of every future payment equal today's price. It captures the coupons and the pull toward par at redemption.
For that same bond bought at 850 with five years left, YTM might be around 6.9 percent, double the current yield. The coupons contribute 3.5 percent and the climb from 850 to 1,000 supplies the rest.
Current yield asks what the bond pays. Yield to maturity asks what you earn. On a bond bought away from par those are not close to the same number.
The Direction of the Gap
| Bond trades at | Relationship | Why |
|---|---|---|
| Discount, below par | YTM above current yield | Gain at redemption adds return |
| Par | All three equal the coupon rate | No capital movement |
| Premium, above par | YTM below current yield | Loss at redemption subtracts |
The premium bond case catches people out. A bond with a 7 percent coupon trading at 1,120 looks generous. But you will receive 1,000 at maturity, so 120 dollars of the price disappears over the holding period. The real return is lower than the coupon suggests.
What YTM Quietly Assumes
YTM assumes you hold to maturity, that every payment is made, and that each coupon is reinvested at the same YTM rate. That last assumption is the one that fails most often.
If you receive a coupon and rates have fallen, you reinvest at a lower rate and your realised return falls short of the quoted YTM. This is reinvestment risk, and it matters most for high coupon, long dated bonds where a large share of the total return arrives early and has to be redeployed.
The Third Measure
For a callable bond, where the issuer can redeem early, the relevant figure is often yield to call: the same calculation run to the earliest call date instead of maturity. Convention is to quote yield to worst, whichever of the possible outcomes produces the lowest return.
Assuming a premium bond will run to maturity when the issuer holds an option to redeem it in two years is a way to overstate return on paper and be disappointed in practice.
Reading a Quote
When a desk quotes a bond at a yield, they mean YTM. Financial sites often display current yield alongside, and a retail platform showing a large distribution yield on a bond fund is closer to the current yield concept than to what an investor will earn.
The practical check is simple: compare the price to 100. Anything above par has a built in capital loss to maturity and any yield figure ignoring that is flattering the bond.
The Bottom Line
Current yield measures income against price and stops there. Yield to maturity folds in the movement from purchase price to par and is the number that describes actual return. On a discount bond YTM is higher, on a premium bond it is lower, and the difference grows with how far from par the bond trades. Compare like with like or you are not comparing bonds at all.