A bond’s whole appeal is the income it pays. That income is the coupon — and how it compares to what you pay for the bond is the yield. They sound similar but mean different things.
The coupon: fixed interest
The coupon is the interest a bond pays, set when it’s issued and usually fixed. It’s quoted as an annual rate of the face value:
A $1,000 bond with a 5% coupon pays $50 a year — no matter what the bond later trades for.
That dollar amount never changes. What can change is the price you pay to get it.
Current yield: income vs price
Bonds trade after they’re issued, and rarely at exactly face value. Current yield measures the income relative to what you actually pay:
Current yield = annual coupon ÷ current price
That same $50 coupon is a 5% yield if you pay $1,000, but a 5.6% yield if you pick the bond up for $900. Pay less, and the fixed coupon becomes a bigger return. This is why price and yield are linked — a theme we’ll dig into next.
Yield to maturity: the fuller picture
Current yield ignores something: if you buy below face value, you also pocket a gain when the bond repays $1,000 at maturity (and a loss if you paid above). Yield to maturity (YTM) rolls it all together:
YTM = the total annualised return if you hold to maturity — counting the price you paid, every coupon, and the face value repaid.
YTM is the number investors actually compare bonds on, because it captures the complete deal, not just the coupon.
Worked example
A bond with a $1,000 face value and a 5% coupon pays $50 a year. What you earn depends on the price you pay:
- At face ($1,000): current yield = $50 ÷ $1,000 = 5%.
- At a discount ($900): current yield = $50 ÷ $900 ≈ 5.6% — the fixed $50 is a bigger slice of a smaller price.
- At a premium ($1,100): current yield = $50 ÷ $1,100 ≈ 4.5%.
Same bond, same $50 — but the yield rises as the price falls, which is exactly why bond prices and yields move in opposite directions.
The takeaway
The coupon is the fixed interest in dollars; the yield is your return given the price you pay. Current yield is coupon ÷ price, and yield to maturity is the full return to the end. Same coupon, different yields — depending on price.