Insights
Current Yield vs Yield to Maturity
Alphanume Team · June 2, 2026
Why the coupon yield understates total return — and when ignoring the pull-to-par can cost you.
Two bonds, both quoted at a 5% yield. One is measured by current yield, the other by yield to maturity. They are not the same number, and confusing them is one of the most common errors in fixed-income analysis. The current yield vs ytm distinction matters because current yield sees only the annual coupon relative to today's price, while YTM captures the full internal rate of return — coupons, reinvestment, and the pull-to-par gain or loss baked into the price. If you are buying a bond at a discount or a premium, current yield can mislead you by a wide margin. Use the bond pricing calculator to confirm any yield figure before acting on it.
Current yield: the quick-and-dirty number
Current yield is straightforward to compute:
Current yield = Annual coupon ÷ Current price
A bond with a $1,000 par value, a 6% coupon rate, and a current price of $950 pays $60 per year. Its current yield is 60 ÷ 950 = 6.32%. That is the entirety of what the calculation tells you: the annualised cash income as a percentage of what you pay today.
Notice what it omits. When the bond matures, the holder receives $1,000 — $50 more than the purchase price. That $50 capital gain is real return, but current yield is blind to it. Conversely, a bond bought at $1,050 will return only $1,000 at maturity, a $50 capital loss that current yield equally ignores. Current yield also takes no account of when cash flows arrive or the time value of money between coupon dates and the final repayment.
Yield to maturity: the full IRR
Yield to maturity (YTM) is the single discount rate that equates the present value of all future cash flows — every coupon plus the par repayment — to the bond's current price. Algebraically it solves:
P = C ÷ (1+y) + C ÷ (1+y)2 + … + (C + F) ÷ (1+y)n
where P is the current price, C the periodic coupon, F the face value, n the number of periods, and y the per-period yield. YTM is the value of y that makes this equation hold. In plain terms it is the bond's internal rate of return assuming you hold to maturity and reinvest every coupon at the same rate — a convenient but explicit assumption.
For the same $950 bond above with five years to maturity (annual coupons, $1,000 par):
- Cash flows: $60 per year for years 1–5, then $1,000 at year 5.
- Solving numerically: y ≈ 7.19%.
- Current yield: 6.32%. YTM: 7.19%. The 87 basis-point gap is the annualised capital gain from buying at a discount.
The spread between the two is not noise — it is the pull-to-par encoded into a single number.
The ordering rule: discount, par, and premium bonds
Three quantities — coupon rate, current yield, and YTM — always sit in a predictable order depending on whether the bond trades at a discount, at par, or at a premium. The table below illustrates this with a concrete bond (6% coupon, $1,000 par, 5-year maturity):
| Bond | Price | Coupon rate | Current yield | YTM |
|---|---|---|---|---|
| Discount bond | $900 | 6.00% | 6.67% | 8.27% |
| Par bond | $1,000 | 6.00% | 6.00% | 6.00% |
| Premium bond | $1,100 | 6.00% | 5.45% | 3.90% |
The ordering rule, without exception:
- Discount bond: Coupon rate < Current yield < YTM. Buying below par means a capital gain at maturity, so YTM exceeds both income measures.
- Par bond: Coupon rate = Current yield = YTM. All three collapse to the same number when price equals face value.
- Premium bond: YTM < Current yield < Coupon rate. Buying above par means a capital loss at maturity, so YTM is pulled below the income yield.
When current yield is a reasonable proxy
Current yield is not worthless — it is fast, transparent, and requires no calculator beyond basic arithmetic. It is a reasonable approximation in two specific situations:
- Near-par bonds. When price is close to $1,000, the capital gain or loss at maturity is small relative to the coupon stream. A bond at $990 with 10 years to maturity has a YTM roughly 4–5 basis points above its current yield — close enough for a quick comparison.
- Perpetual or very long-dated bonds. For a perpetuity there is no maturity payment, so YTM and current yield converge exactly. For a 30-year bond, the par repayment is deeply discounted, and the capital gain or loss component contributes relatively little to YTM. Current yield gives a useful ballpark.
It also survives as a practical tool for screening a large list of bonds — filtering out anything below a target income threshold — before moving to full YTM analysis on the shortlist.
When current yield badly misleads
Current yield becomes seriously inaccurate in four conditions, and fixed-income practitioners learn to distrust it in all of them:
- Deep discount bonds. A zero-coupon bond has a current yield of exactly zero regardless of price. Its entire return is the pull-to-par capital gain, which YTM captures and current yield misses completely. A zero trading at $600 with 10 years to maturity has a YTM of roughly 5.24% — not zero.
- Deep premium bonds. A bond with an 8% coupon trading at $1,150 looks attractive by current yield (≈ 6.96%) but its YTM may be well below 5% once the capital loss at maturity is accounted for.
- Short maturities. With only one or two years remaining, the par repayment arrives quickly and the time-value effect of any discount or premium is large relative to the remaining coupon stream. A one-year bond at $950 has a current yield of 6.32% but a YTM of roughly 11.6% — nearly double.
- Comparing bonds across maturities. Two bonds with identical current yields but different maturities are not equivalent total-return alternatives. YTM captures the reinvestment and capital gain/loss differences; current yield strips them out.
The practical takeaway
Current yield answers one narrow question: how much annual income does this bond generate per dollar invested today? It is the fixed-income equivalent of a dividend yield — useful for budgeting cash flows, irrelevant for measuring total economic return. YTM answers the broader question every investor actually cares about: if I buy this bond today and hold it to maturity, what annualised return do I earn on my capital? For any bond trading away from par or with a maturity under roughly five years, the difference is large enough to change a decision. Always confirm yield figures with a bond pricing calculator before comparing bonds — the arithmetic is straightforward, but it is easy to pick up the wrong number from a data feed that may be quoting current yield where you expect YTM.