Current Yield vs. Yield to Maturity: Worked Example
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Current yield is the yearly coupon divided by the bond's current price. Yield to maturity (YTM) is the single discount rate at which all remaining coupons and the principal repayment add up to the price, so it also counts the gain or loss between price and par.
Definitions as FINRA states them
FINRA defines current yield as the yearly coupon payment divided by the bond's price. Its example: a new $1,000 bond paying $65 a year has a current yield of 6.5 percent, and if the price dropped to $950 the current yield would rise to 6.84 percent.
FINRA defines YTM as the overall interest rate an investor receives by buying at the market price and holding to maturity; mathematically it is the discount rate at which the sum of all future cash flows from coupons and principal repayment equals the price.
Why they differ
Current yield ignores what happens at maturity. If you pay less than par, you also collect the difference when the bond is redeemed at par, and YTM includes that; if you pay more than par, YTM includes the loss. YTM has no simple formula, so it is solved by trial and error or a calculator, and exam questions usually give you enough to rank the yields instead.
Worked example: a 5% coupon, 10-year bond at a discount and at a premium
Same bond as the bond-price page: $1,000 par, 5.00% coupon ($50 a year), 10 years, semiannual coupons, yield quoted as twice the semiannual rate. Prices come from market yields of 6% and 4%.
YTM is solved numerically (the price is the present value of 20 coupons and par, so the rate is found by bisection) and rounded to two decimals.
| Price | Coupon rate | Current yield | YTM | Trading at |
|---|---|---|---|---|
| $925.61 | 5.00% | 5.40% | 6.00% | Discount |
| $1,000.00 | 5.00% | 5.00% | 5.00% | Par |
| $1,081.76 | 5.00% | 4.62% | 4.00% | Premium |
- Discount bond at $925.61: $50 / $925.61 = 5.40% current yield, but the 6.00% YTM is higher because the holder also gains the move from $925.61 up to $1,000.
- Premium bond at $1,081.76: $50 / $1,081.76 = 4.62% current yield, and the 4.00% YTM is lower because the holder gives back the premium by maturity.
- Ranking: discount bond, coupon < current yield < YTM. Premium bond, coupon > current yield > YTM. At par, all three are equal (the par row).
Common exam traps
- Current yield uses price, not par: $50 on a $925.61 bond is 5.40%, not 5.00%.
- The ranking flips with premium and discount. Memorize both: discount means YTM is highest, premium means YTM is lowest.
- Coupon rate is fixed on the face amount. It never changes when the price moves.
- Yield to worst is the lower of yield to call and yield to maturity, and FINRA says investors in callable bonds should compare them.
- Current yield is a one-year snapshot of coupon payments relative to price. It does not say what the bond returns if held to maturity.
Practice and related pages
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General education only, not investment advice. Worked examples use illustrative figures and ignore commissions and taxes. Rules change, so confirm with the linked sources.