Investing
How To Calculate Bond Yield
A bond's yield is the income it pays divided by what you paid for it. Because bonds trade at prices above or below their face value, two bonds with the same coupon can yield very different amounts, and the price move at maturity is part of the return.
Quick Answer
Current yield = annual coupon / price paid
- coupon
- Annual interest paid on face value
- price
- What you paid for the bond
- yield
- Annual coupon divided by price, as a percentage
Divide the annual coupon by the price you paid. A 1,000 face bond with a 50 coupon bought at 950 pays 50 a year, so the current yield is 50 / 950 = 5.263%. Bought at a discount you earn more than the coupon rate; bought at a premium you earn less, because the coupon is fixed but the price is not.
What Is Bond Yield?
A bond pays a fixed coupon, usually quoted as a percentage of its face value, for a set number of years, then repays the face value at maturity. The yield is what that income represents relative to the price you actually paid, which can differ sharply from the face value if you bought the bond on the secondary market.
Current yield is the simplest measure: the annual coupon divided by the price. If a bond with a 1,000 face value pays 50 a year and you buy it for 950, your current yield is 5.263%, higher than the 5% coupon rate, because you paid less than face for the same income stream.
The reverse happens with premium bonds. Buy the same bond for 1,050 and the current yield falls to 4.762%, because you paid more for the same 50 of annual income. The coupon is fixed by the contract; only the price moves to reflect current interest rates.
Yield to maturity is the more complete measure, because it also accounts for the gain or loss of principal when the bond is repaid at face value. A discount bond has a yield to maturity above its current yield, and a premium bond below, because the price must converge to face value by maturity.
Bond prices and market interest rates move in opposite directions. When new bonds offer higher rates, existing bonds with lower coupons fall in price until their yields match, and when rates fall, existing bonds rise. This is why a bond held to maturity is safe but a bond sold early can gain or lose.
The coupon is taxed as ordinary income in most taxable accounts, while the price gain or loss is treated as a capital gain or loss. That difference in treatment can make a discount bond slightly more tax-efficient than a premium bond paying the same yield to maturity.
Credit risk sits alongside price risk. A bond paying a high yield usually does so because the issuer is perceived as more likely to default, so a higher yield is compensation for a real chance of losing principal, not free money.
The formula here covers current yield and total income over a holding period. It does not compute yield to maturity, which requires solving for the rate that discounts every coupon and the final principal repayment back to the price, a calculation best done with a financial calculator.
Formula
CY = coupon / price
Annual coupon income divided by the price paid.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| C | Annual coupon | currency | Interest paid each year. |
| P | Price paid | currency | What you paid for the bond. |
Income = coupon x years
Coupons received while the bond is held.
| Symbol | Meaning | Unit | Notes |
|---|---|---|---|
| n | Years held | count | Holding period in years. |
How To Calculate Bond Yield
- 1
Find the annual coupon
Multiply the face value by the coupon rate. A 1,000 bond at 5% pays 50 a year.
- 2
Identify the price paid
On the secondary market this is not the face value. A bond can trade at a discount or a premium to face.
- 3
Divide coupon by price
50 divided by 950 gives a current yield of 5.263%.
- 4
Multiply for total income
For a five-year holding, five coupons of 50 give 250 of income.
- 5
Compare with yield to maturity
A discount bond's yield to maturity exceeds its current yield because of the gain to face; a premium bond's is lower.
Examples
Example 1: A 5% bond bought at 950
- Face value
- 1,000
- Coupon rate
- 5%
- Price
- 950
- Years
- 5
| Step | Calculation | Result |
|---|---|---|
| Annual coupon | 1000 x 0.05 | 50 |
| Current yield | 50 / 950 | 5.263% |
| Total income | 50 x 5 | 250 |
Result: The current yield is 5.263% and the five-year income is 250, with a further 50 gain as the price converges to 1000 at maturity.
Example 2: The same bond bought at 1,050
- Face value
- 1,000
- Coupon rate
- 5%
- Price
- 1,050
- Years
- 5
| Step | Calculation | Result |
|---|---|---|
| Annual coupon | 1000 x 0.05 | 50 |
| Current yield | 50 / 1050 | 4.762% |
| Total income | 50 x 5 | 250 |
Result: The coupon income still totals 250 over the five years, but the current yield falls to 4.762% and the holder also faces a 50 loss as the price converges down to 1000.
Calculator
Current yield
526.32%
- Annual coupon
- $50.00
- Total coupon income
- $250.00
- Gain or loss at maturity
- $50.00
Values update as you type. This calculator covers the single scenario its formula assumes — see Common Mistakes for what it leaves out.
Prefer a full-width tool? Open the Bond Yield calculator page.
Common Mistakes
Confusing coupon rate with yield
The coupon rate is fixed on face value; the yield depends on the price you paid. A 5% coupon can yield more or less than 5% depending on whether you bought at a discount or a premium.
Ignoring the price move to face value
Current yield misses the capital gain or loss at maturity. A discount bond returns less than face, a premium bond more, and yield to maturity captures both.
Assuming a high yield is free money
A high yield usually reflects higher credit risk. The extra income is compensation for a genuine chance of default, not a riskless bonus.
Forgetting that prices move with rates
If rates rise after you buy, your bond's price falls. Selling before maturity locks in that loss, while holding to maturity avoids it.
Ignoring inflation
A fixed coupon loses purchasing power each year. A 5% nominal yield with 3% inflation is a 2% real return before tax.
Overlooking tax on the coupon
Coupon income is usually taxed as ordinary income, which can cut the effective yield substantially for higher-rate taxpayers.
Treating all bonds as equally safe
Government and high-grade corporate bonds differ enormously from high-yield issuers in default risk. Yield alone does not compare them fairly.
FAQ
What is the difference between coupon rate and current yield?
The coupon rate is the fixed percentage of face value paid each year. Current yield is that coupon divided by the price you actually paid. They differ whenever the bond trades away from face value.
Why do bond prices fall when interest rates rise?
A new bond issued at a higher rate makes existing lower-coupon bonds less attractive, so their price falls until their yield matches the market. Prices and rates always move in opposite directions.
What is yield to maturity?
The single rate that makes every future coupon and the final principal repayment worth exactly the price you paid. It is the most complete measure of a bond's return if held to maturity and includes the price-to-face gain or loss.
Is a higher yield always better?
No. A higher yield usually signals higher risk, either credit risk or interest-rate risk. Compare bonds of similar quality and maturity when judging the yield.
How are bond coupons taxed?
In most taxable accounts coupons are taxed as ordinary income in the year received, while any price gain or loss is treated as a capital gain or loss. Tax-advantaged accounts shelter both.
What is a discount bond?
A bond bought for less than its face value. Because it repays more than you paid, its yield to maturity is higher than its current yield, which is one reason discount bonds appeal to income investors.
References
- [1]Investor.gov, U.S. Securities and Exchange Commission, Bond basics — https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds
- [2]Investopedia, Bond yield — https://www.investopedia.com/terms/b/bond-yield.asp
- [3]Federal Reserve, Interest rate risk — https://www.federalreserve.gov/econres/notes/feds-notes/