Yield to maturity: the only honest number a bond has

A bond carries several numbers, and three of them get confused regularly: the coupon rate, the current yield and the yield to maturity.

The coupon rate

The percentage of face value the issuer pays each period. Fixed at issue and never changed (except on floating-coupon bonds).

Issues cannot be compared by coupon rate: it takes no account of what you paid for the bond.

Current yield

The coupon divided by the current price. It accounts for the entry price and ignores the return of face value at maturity — that is, it ignores the gain or loss between purchase price and par.

Yield to maturity

It accounts for everything: every future coupon, the return of principal, the term and the purchase price.

{{figure:coupon-timeline|caption=Yield to maturity accounts for the coupons, the return of principal and the purchase price alike}}

It is the only one of the three by which issues are comparable.

What to read alongside it

The issuer's credit quality: a high yield is sometimes payment for the risk of not being repaid — OFZ and corporate bonds: what the premium pays for.

Duration: it shows how sharply the price will react to a rate change — Duration: why long bonds fall harder.

Whether there is a put date: yield on a bond with one is calculated differently — The put date: miss it and you are left holding a different bond.

And tax

Coupons and discounts are taxed differently, and after tax the picture changes — Tax on coupons: how it changes the choice of bond.