Yield to Maturity vs Current Yield: Key Differences

The two most common ways to express a bond’s return are yield to maturity and current yield—but they measure different things. Yield to maturity assumes you hold the bond until it matures and includes the capital gain or loss from price changes. Current yield is a simple ratio of the annual coupon to the current price and ignores maturity entirely. Understanding which one matters for your decision is essential.

Current Yield: The Simple Income Metric

Current yield is straightforward: divide the bond’s annual coupon by its current market price.

Current Yield = Annual Coupon ÷ Current Price

If a bond pays $50 annually and trades at $1,000, the current yield is 5%. If that same bond’s price drops to $900, the current yield rises to 5.56%. If it climbs to $1,100, the current yield falls to 4.55%.

Current yield tells you the cash income rate you’re earning right now, assuming you hold the bond for one year and coupons are not reinvested. It answers the question: “What percentage of my investment am I getting back in coupon cash each year?”

Yield to Maturity: The Complete Return Picture

Yield to maturity is more complex. It is the discount rate that makes the present value of all future coupon payments and the principal repayment equal to the bond’s current price. In other words, it is the annualized rate of return you earn if you buy the bond today, hold it to maturity, and reinvest all coupons at that same rate.

The YTM formula involves solving:

Price = [Coupon ÷ (1 + YTM)] + [Coupon ÷ (1 + YTM)²] + … + [Coupon + Par ÷ (1 + YTM)^n]

where n is the number of coupon periods remaining. This is not solved algebraically; financial calculators or spreadsheets find the YTM by iteration.

YTM answers: “What is my total annualized return if I hold this bond to maturity?”

A Concrete Comparison

Suppose you consider buying a three-year bond with $100 par and a 4% annual coupon ($4 per year).

Scenario 1: Bond trades at par ($100)

• Current yield = $4 ÷ $100 = 4%
• YTM = 4%

When price equals par, the two measures converge. The coupon rate, current yield, and YTM are all the same.

Scenario 2: Bond trades at discount ($95)

• Current yield = $4 ÷ $95 = 4.21%
• YTM = 5.22% (approximately, solving the YTM equation)

The bond has depreciated below par. You buy at $95, collect three $4 coupons, and get back $100 principal—a $5 gain over three years. The YTM (5.22%) captures this capital gain in its return figure and is larger than the current yield (4.21%), which ignores the gain.

Scenario 3: Bond trades at premium ($105)

• Current yield = $4 ÷ $105 = 3.81%
• YTM = 2.86% (approximately)

The bond has appreciated above par. You buy at $105, collect three $4 coupons, but only get back $100 principal—a $5 loss. The YTM (2.86%) is lower than the current yield (3.81%) because the capital loss reduces your total return.

Why the Difference Matters

For a buy-and-hold investor planning to own the bond to maturity, YTM is the most relevant figure. It incorporates both coupon income and the capital gain or loss from maturity. If you buy a discounted bond and hold it to par, the YTM is your realized return.

For an income-focused investor buying bonds to collect coupon cash and planning to sell within a year or hold indefinitely without regard to maturity, current yield is more informative. It isolates the cash income from the capital dynamics, which may be less relevant if you never plan to redeem the bond.

For a trader buying and selling bonds within months, neither measure is complete—price appreciation (or depreciation) matters as much as the coupon. A bond with 4% current yield bought at $95 that rises to $100 before you sell gives you income plus a capital gain. YTM and current yield both miss the timing of your exit.

The Reinvestment Assumption

A critical and often-overlooked component of YTM is the reinvestment assumption: the YTM calculation assumes every coupon is reinvested at the YTM rate itself. In the discount scenario above, the 5.22% YTM assumes each $4 coupon earns 5.22% until maturity.

In reality, when you receive a coupon, reinvestment rates may be lower (or higher). This is reinvestment risk. Current yield sidesteps this issue entirely by ignoring reinvestment; it only cares about the coupon paid, not what you do with it.

When YTM Equals Current Yield

This occurs only when the bond trades exactly at par. Once price diverges from par, they diverge as well. The relationship is predictable:

• Bond at discount → YTM > current yield
• Bond at premium → YTM < current yield

The gap widens the further the price is from par and the longer the maturity. A deeply discounted bond with 20 years to maturity will have a YTM significantly higher than its current yield.

Practical Use Cases

Comparing two bonds with different coupons and maturities: Use YTM to ensure an apples-to-apples comparison. A high-coupon bond trading at a premium (low YTM) may not be a better buy than a low-coupon bond trading at a discount (high YTM).

Measuring income production: Use current yield. If you want to know how much cash your bond portfolio generates per year relative to your investment, divide annual coupon income by total market value.

Evaluating a buy-and-hold purchase: Use YTM. It tells you the expected annualized return if you buy today and hold to maturity.

Assessing sensitivity to rate moves: Use duration, not either yield measure. Duration tells you the percentage change in price for a 1% move in yields.

The Relationship to Coupon Rate and Price

The coupon rate is fixed when the bond is issued. If the coupon is 4% and par is $1,000, coupons are always $40 annually. But the coupon rate is not the same as current yield or YTM.

• Coupon rate: Set at issuance; never changes.
• Current yield: Changes whenever the price changes (coupon ÷ price).
• YTM: Changes whenever the price or remaining time to maturity changes.

A bond issued with a 4% coupon rate may, years later, have a 5% current yield (if price fell) and a 6% YTM (incorporating a capital gain to par).

When Market Data Quotes YTM vs Current Yield

Most bond market data systems (Bloomberg, for example) quote YTM as the default yield figure. It is considered the more comprehensive measure. Current yield is usually available but less prominently displayed. For municipal and corporate bonds, YTM is the standard; for very short-dated bonds or when assessing income from a large portfolio, current yield is also useful.

Understanding both prevents misreading a bond’s attractiveness. A bond with a 3% YTM and a 5% current yield is trading at a deep discount. If you buy it, the 3% YTM is your total return if you hold to maturity; the 5% current yield is just the cash you collect per year.

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