Understanding Bond Yields: Measuring Your Return

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is January 24, 2026.

Last week, we explored bond mechanics—face value, coupon rate, and maturity date. We discovered the crucial inverse relationship between interest rates and bond prices: when rates rise, bond prices fall, and vice versa. We watched our example $1,000 bond with a 5% coupon drop to $926 when market rates climbed to 6%.

But I used the word "yield" several times without fully explaining it. Today, we're unpacking this essential concept. Understanding yield—and the different ways to measure it—is fundamental to comparing bonds and evaluating your true return.

What Is Yield?

At its simplest, yield is your return on investment expressed as a percentage. But here's what makes bonds interesting: there are several ways to calculate yield, and each tells you something different about your investment.

The confusion arises because bond prices fluctuate while coupon payments remain fixed. When you buy a bond at a price different from its face value, the stated coupon rate no longer reflects your actual return. This is the primary reason why we need multiple yield measures.

Nominal Yield: The Stated Rate

Nominal yield is simply the coupon rate—the interest rate printed on the bond. Our example bond with a 5% coupon has a nominal yield of 5%. It will pay $50 annually on a $1,000 face value, period.

Nominal yield never changes regardless of what happens to the bond's market price. If you buy that bond for $900 or $1,100, the nominal yield remains 5%. The bond still pays $50 per year based on its $1,000 face value.

This is why nominal yield alone doesn't tell you much about your actual return—it ignores what you actually paid for the bond.

Current Yield: What You're Earning Now

Current yield accounts for the price you paid for the bond in the open market. The calculation is straightforward: divide the annual interest payment by the current market price.

Using our 5% coupon bond paying $50 annually:

If you paid $1,000 (par), your current yield is 5% ($50 ÷ $1,000).

If you paid $926 (a discount), your current yield is 5.4% ($50 ÷ $926).

If you paid $1,082 (a premium), your current yield is 4.6% ($50 ÷ $1,082).

Current yield gives you a better picture than nominal yield because it reflects your actual investment. But it still misses something important: it ignores what happens at maturity.

Yield to Maturity: Your Total Return

Yield to maturity, or YTM, is the most complete measure of return. It accounts for three things: the interest payments you'll receive, the price you paid for the bond, and the gain or loss when the bond matures at face value.

Consider our bond purchased at a $74 discount — meaning you paid $926 for a $1,000 face value bond. You'll receive $50 annually in interest payments. But you'll also receive $1,000 at maturity—a $74 gain over your purchase price. YTM captures both the interest income and this capital gain, expressing them as a single annualized return.

For our discounted bond, the YTM is 6%—the market rate we used to calculate the $926 price in last week's lesson. The math involves present value calculations that professionals handle with financial calculators, but the concept is intuitive: YTM tells you your total annualized return if you hold the bond until maturity.

The reverse applies to premium bonds. If you paid $1,082 for our hypothetical bond, you'll receive $50 annually but lose $82 at maturity when you receive only $1,000 face value. The YTM of 4% reflects this capital loss alongside the interest income.

Yield to Call: When Bonds Can Be Retired Early

Some bonds are callable, meaning the issuer can repay the principal before the maturity date. Companies typically call bonds when interest rates fall—they can retire expensive old debt and issue new bonds at lower rates.

Yield to call, or YTC, calculates your return assuming the bond is called at the earliest possible date. For premium bonds especially, YTC is often lower than YTM because you receive your principal back sooner, giving less time to collect those attractive, above market interest payments.

When evaluating callable bonds trading at a premium, experienced investors often focus on YTC rather than YTM as a more conservative estimate of return.

The Yield Hierarchy

Here's the insight that ties everything together. The relationships between nominal yield, current yield, and YTM follow a predictable pattern based on whether you bought at par, premium, or discount.

At par (meaning you paid face value): All three yields are equal. Your 5% coupon bond bought for $1,000 has a nominal yield, current yield, and YTM all at 5%.

At a discount (you paid less than face value): YTM is greater than current yield, which is greater than nominal yield. You're earning the stated interest plus a capital gain at maturity. For our $926 bond: YTM (6%) > Current Yield (5.4%) > Nominal Yield (5%).

At a premium (you paid more than face value): The relationship reverses. Nominal yield is greater than current yield, which is greater than YTM. You're earning the stated interest but facing a capital loss at maturity. For our $1,082 bond: Nominal Yield (5%) > Current Yield (4.6%) > YTM (4%).

Understanding this hierarchy helps you quickly assess whether a bond's price reflects a premium or discount without doing calculations.

Why This Matters

When comparing bonds, you must compare the right yields to get an apples-apples comparison. Since coupon, term to maturity, call dates, default risk, and other factors can vary wildly between bonds, understanding yield measures is a critical component of any financial literacy journey.

Financial news and bond quotes typically report YTM because it's the most comprehensive measure. When you see that "10-year Treasury yields rose to 4.5%," that's yield to maturity—the total return investors demand for lending to the government for a decade.

Next week, we'll explore the landscape of bond types—Treasuries, corporates, municipals, and high-yield bonds—and discover why different bonds offer different yields based on their risk profiles.

Until next week...

Grace. Dignity. Compassion.