Educational Purpose Only: YTM shown is an approximation. Actual YTM requires iterative calculation and may differ slightly.
How it works
A bond pays regular interest (the coupon) based on its face value and coupon rate. However, bonds trade in the secondary market at prices that may differ from their face value. The current yield simply divides the annual coupon by the market price to show your income return. The yield to maturity (YTM) goes further — it also accounts for any capital gain or loss you will receive if you hold the bond until it matures and gets redeemed at face value.
When a bond trades below its face value (at a discount), the YTM is higher than the current yield because you gain the difference between the purchase price and the face value at maturity. When it trades at a premium, the YTM is lower.
Coupon rate vs. current yield vs. YTM
These three numbers are easy to mix up, but they answer different questions. The coupon rateis the fixed percentage printed on the bond itself — it is set once, at issue, and applies to the face value, not to whatever price you actually pay. A 7% coupon on a ₹1,000 face value bond always pays ₹70 a year, no matter how the bond's market price moves later.
The current yield (annual coupon ÷ current market price) restates that same ₹70 payment as a percentage of what you actually paid today, rather than of the face value. This calculator computes it directly. The approximate YTM goes a step further: it blends the coupon income with the capital gain or loss you will book at maturity, when the bond is redeemed at face value regardless of what you paid for it, and expresses the whole thing as an annualized return over the remaining years to maturity.
| Metric | Formula | Example value |
|---|---|---|
| Coupon rate | Fixed, printed on the bond | 7.00% |
| Current yield | Annual coupon ÷ market price | 7.37% |
| Approx. YTM | (Coupon + (FV − price) ÷ years) ÷ average of FV and price | 8.21% |
Worked example
Take a bond with ₹1,000 face value, a 7% annual coupon, currently trading at ₹950, with 5 years left to maturity. The annual coupon is 7% × ₹1,000 = ₹70. Current yield = ₹70 ÷ ₹950 ≈ 7.37% — already higher than the 7.00% coupon rate, simply because you paid less than face value for the same ₹70 payment. Approximate YTM adds in the ₹50 capital gain you will receive at maturity (₹1,000 − ₹950), spread over 5 years: (₹70 + ₹50 ÷ 5) ÷ ((₹1,000 + ₹950) ÷ 2) ≈ 8.21%, higher still, since it captures both the coupon income and the price recovery.
The relationship always runs the same way: when the market price sits below face value (a discount), current yield rises above the coupon rate and YTM rises above current yield. When the market price sits above face value (a premium), the order flips — current yield falls below the coupon rate, and YTM falls below current yield, since part of your return is eroded by the capital loss at redemption.
Interest rate risk
Bond prices and market interest rates move in opposite directions. If prevailing interest rates rise after you buy a bond, newly issued bonds carry higher coupons, so your older, lower-coupon bond becomes less attractive at face value — its market price falls until its yield catches up with the new market rate. The reverse happens when rates fall: existing higher-coupon bonds become more attractive, and their prices rise, pulling their yields down. Bonds with longer years to maturity are generally more sensitive to this effect than bonds nearing redemption.
Bond types in India
Government Securities (G-Secs)
Bonds issued by the Government of India. Carry sovereign guarantee — zero credit risk. Traded on RBI's NDS-OM platform and available to retail investors via RBI Retail Direct.
Corporate Bonds
Bonds issued by companies to raise capital. Higher yield than G-secs but carry credit risk based on the issuer's financial health and credit rating (AAA to D).
Tax-Free Bonds
Issued by PSUs like NHAI, IRFC, and REC. Interest income is tax-exempt, making them attractive for high-income investors in the 30% tax bracket.
Treasury Bills (T-Bills)
Short-term government securities with tenures of 91, 182, or 364 days. Issued at a discount and redeemed at face value — the yield comes from this price difference rather than periodic coupon payments.
Frequently Asked Questions
What is the difference between current yield and YTM?
Current yield = Annual Coupon / Current Market Price. It shows your income return based on what you paid. YTM (Yield to Maturity) is a more complete measure — it accounts for both the coupon income and any capital gain or loss you will receive if you hold the bond until it matures at face value. YTM is the standard benchmark for comparing bonds.
What does it mean when a bond trades at premium, par, or discount?
A bond trades at par when its market price equals its face value. It trades at a premium when market price > face value (typically when its coupon rate is above current market rates). It trades at a discount when market price < face value (when its coupon rate is below current market rates). Premium bonds have YTM < coupon rate; discount bonds have YTM > coupon rate.
Why does bond price fall when interest rates rise?
When market interest rates rise, newly issued bonds offer higher coupons, making existing bonds with lower coupons less attractive. To compete, existing bond prices fall until their YTM matches current market rates. This inverse relationship between interest rates and bond prices is a fundamental principle of fixed income investing.
What is the difference between government bonds and corporate bonds?
Government bonds (G-secs, T-bills) are issued by the central or state government — they carry near-zero default risk but lower yields. Corporate bonds are issued by companies — they carry higher credit risk (hence higher yields) that varies with the company's credit rating. AAA-rated corporate bonds typically yield 0.5–1% above G-secs; lower-rated bonds yield significantly more.
Related Calculators
This calculator uses an approximation formula for YTM. The exact YTM requires iterative calculation and may differ slightly. Results are for educational purposes only and should not be taken as investment advice.