Bond Yields Explained Simply
A bond’s yield tells you what you really earn, and it isn’t always the same as its interest rate. Here’s the difference between coupon rate, current yield and yield to maturity — and why bond prices move opposite to rates.
By Bogdan · Updated
A bond is a loan you make to a government or company. In return, they pay you interest (the coupon) and give your money back on a set date (the maturity). Bond “yield” is about one question: given the price I pay today, what do I actually earn?
Explain it like I’m 5
Your friend borrows $100 and promises to pay you $5 every year, then give the $100 back in 10 years. That $5 is the coupon: 5%.
Now you want to sell that promise to someone else. But meanwhile, other friends are offering $6 a year for the same kind of deal. Who would pay you $100 for a promise that only pays $5? Nobody — so you have to sell it for less, maybe $93. The buyer still gets $5 a year and $100 at the end, so for them it works out like a 6% deal.
That’s why bond prices go down when interest rates go up — and up when rates go down.
Work out any bond’s price, current yield and yield to maturity with the bond price and yield calculator.
Three kinds of “yield”
| Measure | What it is | Example: $1,000 bond, 5% coupon, 10 years, bought at $950 |
|---|---|---|
| Coupon rate | Yearly interest ÷ face value | $50 ÷ $1,000 = 5.00% |
| Current yield | Yearly interest ÷ price you pay | $50 ÷ $950 = 5.26% |
| Yield to maturity | Total yearly return if held to the end, including the $50 gain at maturity | ≈ 5.66% |
Yield to maturity is the best single number for comparing bonds, because it counts both the interest and the gain or loss on the price.
How bond prices move when rates change
A $1,000 bond paying 5% (twice a year), priced at different market yields:
| Market yield | 2 years left | 10 years left | 30 years left |
|---|---|---|---|
| 4% | $1,019 | $1,082 | $1,174 |
| 5% | $1,000 | $1,000 | $1,000 |
| 6% | $981 | $926 | $862 |
Two lessons:
- Prices and yields move in opposite directions.
- Longer bonds move much more. A 1-point rise in rates barely dents the 2-year bond but knocks about 14% off the 30-year bond.
Duration: a bond’s sensitivity to rates
Duration (measured in years) estimates how much a bond’s price changes when rates move. A rough rule: price change ≈ −duration × change in yield. A bond with a duration of 7 would lose about 7% if rates rose 1 percentage point, and gain about 7% if they fell 1 point.
Premium and discount bonds
- Discount bond — price below $1,000. Yield to maturity is higher than the coupon.
- Premium bond — price above $1,000. Yield to maturity is lower than the coupon.
- At par — price exactly $1,000. Coupon, current yield and YTM are all equal.
Common mistakes
- Comparing coupon rates instead of yields. A 3% coupon bought at a discount can earn more than a 5% coupon bought at a premium.
- Ignoring duration. Long bonds can fall a lot when rates rise.
- Chasing the highest yield. Very high yields usually mean a higher chance of default.
- Forgetting taxes. Treasury interest is free from state tax; municipal bond interest is often free from federal tax; corporate bond interest is fully taxable.
Frequently asked questions
What is the difference between coupon rate and yield?
The coupon rate is fixed when the bond is created: a $1,000 bond with a 5% coupon pays $50 a year, forever. The yield is what you actually earn based on the price you pay. Buy that bond for $950 and your yield is higher than 5%; pay $1,050 and it’s lower.
Why do bond prices go down when interest rates go up?
Because new bonds start paying the higher rate. Nobody will pay full price for an old bond paying 5% when a new one pays 6%, so the old bond’s price falls until its yield matches the market.
What is yield to maturity in simple terms?
Yield to maturity (YTM) is your total yearly return if you buy the bond today, hold it until it ends, and every payment is made. It includes the interest payments and any gain or loss between the price you paid and the $1,000 you get back at the end.
Is a higher bond yield better?
It means more income, but usually more risk too. Higher yields often come from companies or governments that are more likely to miss payments, or from bonds that lock your money up for longer.
Can you lose money on bonds?
Yes. If you sell before maturity after rates have risen, the price may be below what you paid. If the issuer defaults, you may not get all your money back. If you hold a high-quality bond to maturity, you get the face value back.
This article is for general education and is not financial, investment or tax advice. Rates, rules and limits change; check current terms with your bank or the IRS. See our disclaimer.