Some bonds can be paid off early by the issuer. If this bond is callable, turn on This bond is callable in the inputs and enter the call price and call date. This card will show the yield to call and the yield to worst — the lower of the two returns you should plan around.
| Payment | Years out | Coupon | Face repaid | Discount factor | Value today |
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What a bond actually is
A bond is a loan you make to a government or company. You hand over money today, and in return the borrower promises two things: regular interest payments along the way, and the return of a set amount — the face value, also called par — on a fixed future date called maturity. A typical bond has a $1,000 face value, pays interest twice a year, and matures in a set number of years.
The interest is called the coupon. The coupon rate is that yearly interest as a percent of face value. A 5% coupon on a $1,000 bond pays $50 a year — usually as two $25 payments. That dollar amount never changes over the life of the bond, no matter what happens to its price. That fixed payment is the key to everything else on this page.
Why a bond's price moves at all
Once a bond exists, people buy and sell it, and its price floats with the market. The reason is competition. Suppose you own a bond paying $50 a year, but brand-new bonds now pay $70 a year. Nobody will pay full price for your smaller payments, so the price of your bond falls until its return matches what buyers can get elsewhere. If new bonds instead paid only $30, your $50 bond would be prized, and its price would rise. The coupon is frozen, so the price does the moving.
This is the single most important idea about bonds: price and yield move in opposite directions. When yields in the market rise, existing bond prices fall. When yields fall, existing bond prices rise. The chart above draws this exact relationship for your bond.
The three yields, and why they differ
This calculator shows three different "yields," and the gaps between them tell a story. The coupon rate is the printed rate, fixed at issue. The current yield is the yearly coupon divided by the price you actually pay — so if you buy a $1,000 bond with a $50 coupon for $950, your current yield is $50 ÷ $950, or about 5.26%. The yield to maturity, or YTM, is the complete measure: the single yearly rate that accounts for every coupon and the gain or loss between your price and the face value you collect at the end.
Here is the pattern worth memorizing. When a bond trades below face value (a discount), coupon rate < current yield < YTM, because you also pocket a gain when the bond repays par. When it trades above face value (a premium), the order flips: coupon rate > current yield > YTM, because you take a small loss at maturity. And when a bond trades exactly at par, all three are equal. Watching the three tiles line up or spread apart teaches you what kind of bond you are looking at.
What yield to maturity really means
Yield to maturity is the rate that makes the value today of all a bond's future payments — every coupon plus the face value at the end — exactly equal to its price. In other words, it is the bond's internal rate of return if you buy it now and hold it to the end. The cash flow table above makes this concrete: discount every payment back at the YTM and the present values sum to the price you paid. That is what "solving for the yield" means.
YTM carries one built-in assumption worth knowing: it treats every coupon as if you reinvest it at the same yield. In real life you might reinvest coupons at a higher or lower rate, so the return you actually realize can differ a little. YTM is still the standard, best single-number way to compare bonds, but it is a well-defined estimate, not a guarantee.
Premium, par, and discount
A bond priced above its face value trades at a premium; below face value, at a discount; and exactly at face value, at par. Whether a bond is a premium or a discount depends entirely on how its fixed coupon compares to current market yields. A bond whose coupon is higher than today's going rate is worth more than par, so it trades at a premium. A bond whose coupon is lower than today's rate trades at a discount. There is nothing "good" or "bad" about either — the yield to maturity already accounts for the price you pay.
Coupon frequency and how the yield is quoted
Most U.S. bonds pay interest twice a year, and their yields are quoted as a bond-equivalent yield — the yield per six-month period, simply doubled. That is the convention this calculator follows, so the YTM here lines up with how bonds are quoted in the market. Because interest actually compounds each period, the true effective annual yield is a touch higher; you will find it in the summary box under the inputs. The gap is small but real, and it grows with how often the bond pays.
Yield to call and yield to worst
Some bonds are callable, meaning the issuer can pay them off early at a set call price. Issuers call bonds when interest rates have fallen, so they can refinance at a cheaper rate — which is exactly when you would least like your high-coupon bond taken away. The yield to call is the yield to maturity's twin, computed to the call date and the call price instead of to final maturity. Because a call usually cuts your return, prudent investors look at the yield to worst: the lower of yield to maturity and yield to call. It is the return to plan around, not the rosy one.
Interest-rate risk in one sentence
Because price and yield move opposite ways, rising market rates push existing bond prices down — and the longer a bond's maturity, the more its price drops for a given rate move. That sensitivity is called interest-rate risk, and it is why a 30-year bond swings far more in price than a 2-year one. If you hold a bond to maturity you still collect its face value, but if you must sell early, the price you get depends on where yields have gone.
Key takeaway
A bond's printed coupon rate is only the starting point. What you truly earn depends on the price you pay, and yield to maturity is the number that ties the coupons and the price together into one honest annual return. Buy at a discount and you earn more than the coupon; buy at a premium and you earn less; and if the bond can be called, plan around the yield to worst.