Yield to Maturity vs Current Yield: Which Number Is the Yield?

This is the fixed-income version of the problem the data pillar found with P/E ratios and the equities pillar found with dividend yield: the same field name conceals different definitions. Here the stakes are higher, because bond investing decisions are made on yield figures more directly than equity decisions are made on any single ratio. This article defines the three measures that matter — coupon rate, current yield, and yield to maturity — explains what each includes and excludes, adds the professional refinements (yield to call and yield to worst), and states the assumption buried inside yield to maturity that almost nobody mentions.

Three measures, three questions

Coupon rate answers: what percentage of face value does this bond pay each year? It is fixed at issue, calculated on face value, and tells you nothing about return on an investment made at any price other than par. Useful for identifying the bond; useless for comparing it to anything. Current yield (also running yield, or income yield) answers: what income does this bond produce relative to what I pay for it? It is the annual coupon divided by the current price — so a $1,000 bond with a $40 coupon trading at $888 has a current yield of about 4.5%. This is a genuinely useful figure if the question is cash income per dollar invested, and a genuinely misleading one if the question is total return, because it entirely ignores the capital gain or loss to maturity. Buy at a discount and current yield understates what you will earn; buy at a premium and it overstates it, sometimes badly — a bond bought at 115 with a fat coupon can show an attractive current yield while quietly guaranteeing a 15-point capital loss at redemption. Yield to maturity (YTM) answers the real question: what total annualised return will I earn if I buy at this price and hold to maturity, counting every coupon and the gain or loss to par? It is the discount rate that makes the present value of the bond's payments equal its current price — the inverse of the pricing calculation, solved for the rate instead of the price. YTM is the standard quotation in bond markets and the only one of the three that permits sensible comparison across bonds with different coupons, prices, and maturities. Three relationships tie them together and are worth memorising: at a discount, coupon rate < current yield < YTM; at a premium, coupon rate > current yield > YTM; at par, all three are equal. If you can reproduce that ordering, you understand the measures.

What YTM assumes — the part that goes unmentioned

Yield to maturity is the right default, and it rests on assumptions that deserve stating plainly, because "YTM 6%" is often read as a promise and is not one. It assumes you hold to maturity. Sell earlier and your realised return depends on the price then, which depends on prevailing rates — so YTM describes one specific path, not an entitlement. It assumes the issuer performs. Every coupon and the principal, paid in full and on time; a YTM figure on a distressed bond can look spectacular precisely because the market doubts those payments will arrive, which is why very high quoted yields are a description of risk rather than an opportunity — a point the high-yield article develops. And — the assumption almost nobody mentions — it assumes every coupon is reinvested at the YTM itself. The arithmetic that produces a single annualised figure requires the interim payments to keep earning at that same rate, which the real world does not guarantee: if rates fall after purchase, coupons are reinvested at less, and the realised annualised return falls short of the quoted YTM. This is reinvestment risk, it is structural rather than exotic, and it is why zero-coupon bonds — which have no interim payments to reinvest — occupy a special place in fixed income. Two further conventions matter for reading real quotes. Compounding basis: YTM is quoted on a stated frequency (semi-annual in US convention, annual in much of Europe), and the same bond's yield differs slightly depending on which basis is used, so cross-market comparisons need the basis matched. And the measures are gross: the quoted figure precedes any transaction costs, custody fees, and tax, all of which are real and none of which YTM includes — tax treatment in particular varies by jurisdiction and holder and is parked to Annex A in this portal.

The professional refinements: yield to call, yield to worst, and what a screen is showing you

For bonds with embedded options, YTM alone is insufficient. Yield to call computes the return assuming the issuer calls the bond at the earliest (or a specified) call date at the call price rather than letting it run to maturity — a materially different figure for a premium-priced callable bond, since a call cuts short exactly the coupon stream the premium paid for. Yield to worst is then the lowest of all the relevant computed yields — to maturity, to each call date, to any put or sinking-fund date — and it is the conservative standard for quoting callable bonds precisely because the issuer holds the option and will exercise it when it suits them, not you. If a callable bond is quoted only on YTM, the number is optimistic by construction. Two more measures appear in practice and are worth recognising rather than mastering. Yield to put mirrors yield to call for holder-optioned bonds. And for portfolios and funds, aggregate measures like SEC yield and distribution yield follow their own defined methodologies — which differ, which is a Pillar 16 subject. The practical literacy for reading any bond screen reduces to three questions, and they are the same three this portal keeps asking of every field: which measure is displayed (coupon, current, YTM, YTW); on what basis (compounding frequency, and gross of what costs); and as of when — because a yield is computed from a price, and in fixed income that price may be stale or model-derived rather than transacted, since many bonds trade rarely, which is the bond-trading article's subject. Answer those three and a yield figure becomes informative. Skip them and it is decoration.