Bond yields: nominal yield, current yield, yield to maturity and yield to call, at a premium and at a discount

Four questions, four yields

Nominal yield is a fixed rate bond's coupon rate, expressed against par value. A change in market price does not change that coupon rate.

Current yield = annual interest / current market price. A bond paying $60 annually and priced at $1,200 has a current yield of $60 / $1,200 = 5%. Use annual interest, not one semiannual payment, and market price, not par.

Yield to maturity (YTM) incorporates purchase price, remaining coupons, time to maturity, and principal repayment. It includes the gain or loss from buying below or above the redemption value. Current yield excludes that gain or loss. Yield to call (YTC) substitutes the call date and call price for the maturity date and maturity value. These annualized measures do not promise a realized return; actual results depend on payments, holding period, and reinvestment.

Rank rather than calculate

For these rankings, assume a conventional fixed rate bond, positive yields, repayment at par, an earlier call at par, and no taxes or transaction costs. Different call prices or unusual terms can change the call comparison.

• Premium: nominal > current > YTM > YTC. Paying above par lowers current yield below the coupon rate. Losing the premium at redemption lowers YTM further; an earlier call compresses that loss into less time.
• Discount: YTC > YTM > current > nominal. Paying below par raises current yield above the coupon rate. Redemption at par adds a gain; an earlier call realizes it sooner.
• Par: the four measures coincide under the same assumptions.

Read the yield label

For corporate bond trades effected on a yield basis, SEC Rule 10b-10 requires the yield percentage and its characterization. When the basis is yield to call, the confirmation also identifies the type of call, call date, and call price. Callable debt confirmations warn that early redemption can affect the represented yield.

Identify the measure before answering: calculate current yield when asked, but rank maturity and call yields without calculating them.