Reading a yield

Three numbers get called "yield" and they answer three different questions. The gap between them is where bonds are mis-sold.

Coupon rate

The promise, as a percentage of face value. A 9% bond on ₹1,000 face value pays ₹90 a year, for ever, regardless of what the bond costs.

What it tells you: the size of the payments.

What it does not tell you: anything about your return. If you paid ₹1,060 for that bond, you are not earning 9% on your money — you are receiving ₹90 on ₹1,060, and you will also get back ₹1,000 rather than the ₹1,060 you paid.

The coupon is a fact about the bond. It is not a fact about your investment, and treating it as one is the most common error in the subject.

Current yield

The annual coupon divided by the price you paid.

current yield = annual coupon ÷ price
              = 90 ÷ 1,060 = 8.49%

What it tells you: the cash income on your money this year. Genuinely useful if you are living off the income.

What it does not tell you: what happens at maturity. You paid ₹1,060 and will be handed ₹1,000. That ₹60 loss is certain, scheduled, and completely absent from the 8.49%.

Current yield flatters every bond bought above face value and understates every bond bought below it.

Yield to maturity

The one that answers the question. YTM is the annual return you earn if you buy at today's price, hold to maturity, and receive everything promised — counting the coupons and the difference between what you paid and what comes back.

For the bond above, roughly 6.7%. The three numbers line up like this:

Measure	Value	What it leaves out
Coupon rate	9.00%	That you paid ₹1,060, not ₹1,000
Current yield	8.49%	That ₹60 of your capital does not come back
Yield to maturity	~6.7%	Nothing material, if you hold to maturity

Notice the ordering. For a bond trading above face value the coupon flatters, the current yield flatters less, and the YTM is the truth. Below face value the ordering reverses and YTM is the highest of the three.

This is why a bond advertised by its coupon is being advertised by its most flattering number whenever it trades at a premium.

Reading a quote

A bond quote gives price and yield together, because chapter 3 established they are the same statement. Two conventions worth knowing.

Prices are quoted per ₹100 of face value. "98.40" means ₹984 per ₹1,000 bond. A price above 100 is a premium, below 100 a discount.

The price you pay is usually higher than the price quoted. Between coupon dates, interest has accrued to the seller, and the buyer pays it on top. The quoted figure is the clean price; what leaves your account is the dirty price, clean plus accrued interest. You are not being overcharged — you will receive that accrued interest back in the next full coupon.

The assumptions inside YTM

YTM is the right number and it is not a guarantee. Two things have to hold.

You hold to maturity. Sell early and you get the market price of chapter 3, not the YTM.

Coupons are reinvested at the same rate. The arithmetic assumes each ₹90 goes back to work at the YTM. In practice you reinvest at whatever rates exist when the coupon arrives, which is reinvestment risk — a quiet one, because a falling-rate world that makes your bond's price rise is the same world that makes the coupons reinvest badly.

For a short bond this barely matters. For a 30-year bond, a large share of the YTM depends on an assumption about rates two decades out.

The number to ask for

When anyone quotes you a bond, the question is: what is the yield to maturity, at the price I would actually pay?

That single question removes the coupon trick, the current yield trick, and the stale-price trick in one go. If the answer is not readily given, that is information too.

The point

Coupon is a fact about the bond, current yield is this year's income on your money, and yield to maturity is what you actually earn if you hold. A bond trading above face value flatters itself with its coupon — so always ask for the YTM at the price you would pay.