Bond Yields Explained
Coupon, current yield, yield to maturity: what each number actually tells you.
The Basics
A bond pays a fixed coupon and returns face value at maturity. Bonds trade in the secondary market.
Coupon Rate
``
$1,000 par bond with 5% coupon = $50/year
`
Set at issue, doesn't change.
Current Yield
`
Current Yield = Annual Coupon / Current Price
``
Ignores gain or loss at maturity.
Yield to Maturity (YTM)
The all-in expected return if you hold to maturity. Standard for comparing bonds.
Yield Curve
Plot of yields by maturity. Inverted curve historically signals recession.
Real vs Nominal
5% nominal yield with 3% inflation = roughly 2% real. TIPS pay real yield directly.
Credit Spread
Corporate bonds yield more than Treasuries to compensate for default risk.
Duration
Bond price sensitivity to interest rate changes. Duration of 7 means 1% rate rise drops price ~7%.
Tax Treatment
US Treasury interest exempt from state tax. Municipal bond interest typically exempt from federal tax.
Educational only. Not financial advice.