Bond Yield

A bond yield expresses a bond's return as an annual percentage of its price. Three versions matter. The coupon rate is fixed at issue: 4% of a $1,000 face is $40 a year forever. The current yield is the coupon divided by today's price: the same $40 on a $950 bond is 4.2%. The yield to maturity is the full return if held to maturity, folding in the discount or premium and every remaining coupon, and it is the number markets quote.

The governing rule is inversion: prices and yields move in opposite directions. When new bonds pay more, old bonds fall in price until their yields match; when rates fall, existing bonds rise. A bond bought below face value, at a discount, yields more than its coupon; bought above face, at a premium, it yields less, because the principal repaid at maturity is smaller than the price paid. The 2022 rate shock raised Treasury yields from under 2% to above 4% by cutting prices, the same event described from two sides.

The arithmetic starts with three numbers: the coupon, the price, and the years remaining. The current yield is the simplest: a $40 coupon on a $950 price is 4.21%. The yield to maturity adds the capital piece. Buying at $950 and collecting $1,000 at maturity earns $50 of price appreciation spread over the remaining years, which lifts the total return above the current yield. A 10-year note with a 4% coupon at $950 yields roughly 4.6% to maturity; the same note at $1,050 yields roughly 3.4%.

The inversion rule governs everything. A 1-point rise in market rates cuts the price of a duration-7 bond by roughly 7%, and the cut raises the bond's yield to the new market level, which is the same fact described from the holder's side and the buyer's side. Falling rates reverse it. This is why the same year can be reported as a bond bear market, prices fell, and a bond buyer's market, yields rose, with no contradiction between them.

The quoted yield is a hypothesis with one condition: holding to maturity. Sell early and the realized return is the price change plus the coupons received, which can differ from the yield by the whole drawdown. Bond funds report an SEC yield, the trailing 30-day portfolio yield net of fees, and the fund's duration determines how much the yield and the price will move together. For funds there is no maturity date, so the yield to maturity is an average, not a promise.

Yield is the number bond investors live by, and comparing it wrong is the standard entry-level mistake. The 5% coupon bond trading at 110 yields less to maturity than the 4.5% bond at par, because the premium is repaid at a loss. The comparison that matters is yield to maturity at the same duration, and the price paid is the input that turns the same bond into two different investments.

I watched a colleague named Brent (yes, that Brent) sort a corporate bond list by coupon and buy the top of the column at 108, describing the 5.2% coupon as his retirement income. The yield to maturity at his price was roughly 4.1%, and the premium amortized away over the years he held it. He had compared the wrong numbers and collected the right ones slowly.

The highest-leverage thing most Americans can do is compare yields at equal duration, buy the yield rather than the coupon, and hold to maturity so the quoted number becomes the realized one. The yield on a T-bill or Treasury is the risk-free rate everything else is judged against, and it is published weekly at auction. Run the comparison with the bond yield calculator and check the discount math with the zero coupon bond calculator.