Question 1

What is current yield?

Accepted Answer

Current yield is the annual coupon payment divided by the current bond price, expressed as a percentage. It tells you the income return you would earn over the next year based on what you pay for the bond today. It ignores capital gains or losses and the time value of money.

Question 2

What is yield to maturity (YTM)?

Accepted Answer

Yield to maturity is the total annualized return you would earn if you bought the bond at today's price and held it until it matures, receiving all coupons and the face value. It accounts for both coupon income and any capital gain or loss. YTM is the internal rate of return of the bond's cash flows.

Question 3

What is the difference between YTM and coupon rate?

Accepted Answer

The coupon rate is fixed at issuance and determines the cash payout as a percentage of face value. YTM reflects the actual return based on the price you pay. When a bond trades at a discount (below face value), YTM is higher than the coupon rate; at a premium, YTM is lower than the coupon rate.

Question 4

How is yield to call (YTC) different from YTM?

Accepted Answer

Some bonds can be redeemed (called) by the issuer before maturity at a call price. Yield to call is the return if the bond is called at the earliest call date rather than held to maturity. Callable bonds often show both YTM and YTC so investors can see the worst-case (yield to worst) return.

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