Understanding Bond Yield: YTM, Current Yield and Why Prices Move Inversely
Blog › Finance · 9 min read · Published 2026-05-07
How bond yield to maturity works, the difference from current yield, and why falling prices mean rising yields.
The Three Yields Every Investor Must Know
Coupon yield is the bond's stated rate. Current yield is annual coupon divided by today's market price. Yield to maturity (YTM) is the internal rate of return if held to maturity, assuming coupons are reinvested at the same rate. Of the three, YTM is the only complete measure. Use the Bond Yield Calculator to compute all three.
Why Prices and Yields Move Inversely
A bond's cash flows are fixed at issue. If interest rates rise, new bonds offer better coupons, so the old bond must drop in price to match. If rates fall, the old bond's coupons look generous and its price rises. The math is mechanical — it's the discount rate in the present-value equation moving.
The YTM Equation
P = Σ C/(1+y)^t + F/(1+y)^N. Solving for y has no closed-form answer, so calculators use Newton-Raphson iteration. Our calculator converges in milliseconds.
Premium, Par and Discount Bonds
If price > face value, the bond is at a premium and YTM < coupon. If price = face value, the bond is at par and YTM = coupon. If price < face value, the bond is at a discount and YTM > coupon. Understanding this saves you from over-paying for premium bonds.
Reinvestment Risk
YTM assumes coupons are reinvested at the same yield. If rates fall after you buy, you'll reinvest coupons at lower rates and your realised return will be below the quoted YTM. This is reinvestment risk and is the dirty secret of bond math.
Duration vs Yield
YTM tells you total return; duration tells you price sensitivity. A 10-year bond with a duration of 8 will fall ~8% if rates rise 1%. Pair YTM analysis with duration to size interest-rate risk.
Tax Considerations
Coupon income is taxed as ordinary income. US Treasury interest is exempt from state tax. Municipal bonds are exempt from federal tax. Always compare on an after-tax YTM basis when shopping fixed income.
Bottom Line
If you only learn one bond metric, learn YTM. It is the apples-to-apples yardstick for comparing bonds across coupons, prices and maturities.