Finance⏱ 5 min read
How to Calculate Bond Yield and Yield to Maturity
Coupon rate is not the same as yield. Here is how to calculate current yield, yield to maturity, and why prices and yields move in opposite directions.
Bonds are the backbone of institutional portfolios. Understanding yield — not just the coupon — is essential for comparing fixed income investments across different prices and maturities.
Current Yield vs Coupon Rate
Coupon rate: fixed % of face value, never changes.
Current yield = Annual coupon / Current market price x 100
UK Gilt: face value £1,000, coupon 4% = £40/year.
If price rises to £1,100: Current yield = 40/1100 = 3.64%
If price falls to £900: Current yield = 40/900 = 4.44%
Bond prices and yields always move in opposite directions.
Yield to Maturity (YTM)
YTM = total return if held to maturity (coupon + capital gain/loss)
Approximate formula:
YTM = (Coupon + (Face-Price)/Years) / ((Face+Price)/2)
Bond: face £1,000, coupon £40, price £900, 10 years:
YTM = (40 + (1000-900)/10) / ((1000+900)/2)
= (40+10) / 950 = 50/950 = 5.26%
Premium over current yield (4.44%) = capital gain to maturity.
Duration: Rate Sensitivity
Modified Duration: % price change per 1% yield change.
Bond with Modified Duration 8:
Rates rise 1%: bond price falls ~8%
Rates fall 1%: bond price rises ~8%
Long-dated bonds have higher duration = more rate sensitive.
Zero-coupon bond: Duration = Years to maturity (maximum duration).