Bond Yield Explained: Current Yield, YTM and Yield to Call Compared

When I compare bonds, I start with two questions: how much will I pay, and what payments could I receive? These questions help me understand the return on my money.

A bond’s interest rate tells me how much interest it pays on its face value. Face value is the amount used to calculate the interest. It may differ from the price I pay to buy the bond.

This is why I check bond yield. Current yield, yield to maturity and yield to call help me look at the return in different ways.

Current yield: How much interest does my money earn?

Current yield compares the yearly interest payment with the bond’s market price.

Suppose a bond has a face value of ₹1,000 and pays ₹80 in interest each year.

If I buy it for ₹1,000, its current yield is 8%. If I buy it for ₹950, the current yield rises to about 8.42%. I still receive ₹80, but I have paid less to receive it.

If I pay ₹1,050, the current yield falls to about 7.62%.

The calculation is:

Current yield = Yearly interest ÷ Market price × 100

I find this useful for understanding interest income. However, it does not include the difference between my purchase price and the amount I receive when the bond is repaid.

Yield to maturity: What if I keep the bond until the end?

A bond’s maturity date is the date when its final repayment is due.

Yield to maturity, or YTM, considers the purchase price, remaining interest payments, time left and the amount due at maturity.

For example, suppose I buy a bond for ₹950. It pays interest during the holding period and repays ₹1,000 at maturity. The extra ₹50 adds to my return.

Now suppose I pay ₹1,050 for the same bond. If it repays ₹1,000, I receive ₹50 less than I paid. This reduces my overall return.

YTM includes this gain or loss along with the interest payments.

I use YTM when comparing bonds I may keep until maturity. But it is not a guaranteed return. Payments must arrive as scheduled. Earning the quoted compound return also depends on reinvesting interest at the same rate. Taxes and costs can reduce my earnings.

Yield to call: What if the issuer repays me early?

Some bonds allow the issuer, the organisation borrowing the money, to repay before maturity. This is called a call option.

Yield to call, or YTC, calculates the yearly return assuming repayment happens on a specified call date at the stated price.

Early repayment means I stop receiving interest sooner. This matters if I paid more than the bond’s face value, because I have fewer interest payments to make up for that extra cost.

I check the call date and repayment price before buying a callable bond. The issuer may use this option, but early repayment is not certain.

What I check before investing

Before I invest in bonds, I use current yield to understand the interest relative to the price. I check YTM for the return calculated until maturity and YTC for possible early repayment.

I also check the issuer’s ability to repay, the credit rating and the payment dates. A higher yield alone is not enough for me to choose a bond. I need to understand when I could receive my money and what could affect those payments.