In this article:
Bonds are low-risk investments that can diversify your portfolio and provide steady income payments. There are two main ways to compare bond yields: The current yield versus yield to maturity.
The current yield shows a bond's present cash flow, or the return you're getting today, while yield to maturity predicts total returns over the life of the bond. Understanding how they work can help you make more informed investment decisions.
| Current Yield | Yield to Maturity | |
|---|---|---|
| What it measures | Income provided by a bond at a given moment | Total potential returns over the life of the bond, assuming the investor holds it until maturity |
| How it's calculated | Divide the annual interest payment by the current bond price | Uses a more complex calculation based on the coupon payment, present value, face value and maturity term |
| Why it matters | Can clarify a bond's current return so you can decide if it's a worthwhile investment | Can help you understand a bond's total returns from start to finish |
What Is Current Yield?
A bond's current yield is the return you're getting today based on the bond's current price. It can fluctuate depending on the price of the bond at any given time, but it's a simple metric that can help you better understand a bond's cash flow. Having this information on hand may help guide your investment strategy.
You can calculate the current yield by dividing the annual interest payment by the bond price. Just be aware that it only considers the present moment and does not reflect the bond's total returns over time.
Learn more: What Are Bonds?
Browse Top Brokerages
What Is Yield to Maturity?
Yield to maturity can also be helpful when investing in bonds. It reflects the annual rate of return if the investor holds the bond until it matures. Yield to maturity factors in:
- All coupon payments (also known as interest payments)
- The return of the principal, which is the original purchase amount
- The bond's maturity timeline
A bond's yield to maturity can paint a more complete picture than its current yield—and that can help investors compare bonds over time. But calculating it is a bit complicated. The formula is:
Important Details When Calculating Yield to Maturity
A bond's face value, or par value, is its value when the bond is first issued. It's also the amount you'll get back when the bond matures. The par value for most bonds is $1,000.
The coupon rate, which is the annual interest rate the bond pays, usually doesn't change after the bond is issued. If you purchase a bond at face value and keep it in your portfolio until it matures, its coupon rate and current yield will be the same.
- If you buy a bond for less than its face value: The yield to maturity will be higher than the current yield.
- If you buy a bond for more than its face value: The yield to maturity will be lower than the current yield.
Current Yield vs. Yield to Maturity
The key difference between current yield and yield to maturity is that yield to maturity estimates the bond's total returns once it matures. That includes all interest payments and the return of the principal.
The current yield simply shows a bond's cash flow today—or how much income it's currently generating based on the present bond price. Both metrics can help investors compare bonds and refine their investment strategy, but they represent two different things.
Example of Current Yield vs. Yield to Maturity
Let's say you've purchased a bond that's currently priced at $800. The face value is $1,000 and the coupon rate is 6%. That puts the annual interest payment at $60. The maturity period is 10 years.
Yield to Maturity Method
You can use this information to calculate the yield to maturity, which is 8.9%.
- 60 + (1,000 - 800) ÷ 10] ÷ [(1,000 + 800) ÷ 2] = 0.089
Current Yield Method
Now let's look at the current yield, which is fairly easy to calculate. Simply divide the annual interest payment by the current bond price. That works out to 7.5%.
- 60 ÷ 800 = 0.075
In this case, the yield to maturity is higher than the current yield.
Which Is Better: Current Yield or Yield to Maturity?
The right approach for you will depend largely on your investment timeline.
When Yield to Maturity Might Make More Sense
The yield to maturity provides a broader measurement that considers total returns from start to finish. That can prove helpful when comparing different bonds to add to your portfolio—especially if they have varying interest payments and maturity lengths.
When Current Yield May Be Best
While yield to maturity takes a long view, the current yield offers a present-day snapshot. This metric could come in handy if you plan on selling the bond before it matures. It also uses a simple formula that you can quickly calculate on the spot.
The Bottom Line
Understanding a bond's current yield versus yield to maturity can help you make more informed investment choices that ultimately support your goals. Calculating yield to maturity requires more legwork, but it can also provide a more accurate estimate of a bond's total returns. The current yield only reflects a bond's cash flow at a particular moment in time. Both can be useful when investing, and your timeline will likely determine which one is best for you.