Current yield vs. YTM: the CFA bond-yield trap
A bond pays a 6% coupon and trades at 95. What's its yield? You divide the coupon by the price, get 6.3%, and move on — except the question asked for yield to maturity, and that number is higher. Coupon rate, current yield, simple yield, and YTM are related but distinct measures, and grabbing the wrong one is an easy way to answer a CFA Level I Fixed Income question incorrectly.
Current yield — the quick, incomplete one
Current yield = annual coupon ÷ current price. It measures the cash income relative to what you pay, and that's all it measures. It leaves out the gain or loss you book as the price pulls to par by maturity, reinvestment income, and the time value of money. It's an income-yield measure, not a total-return measure.
Yield to maturity — the complete one
Yield to maturity (YTM) is the single discount rate that sets the present value of all the bond's promised cash flows — every coupon plus the par repayment — equal to its current price. It bakes in the coupon income, the gain or loss between price and par, and the time value of money.
One caveat the exam likes to test: YTM is only your realized return if you hold to maturity, the issuer pays everything as promised, and you reinvest each coupon at that same YTM. So a question that hands you those assumptions — or asks for the IRR of the cash flows — is pointing at YTM. Don't assume that any mention of "return" means YTM by default.
There's also simple yield, a rough approximation:
Simple yield = [annual coupon + (par − flat price) ÷ years to maturity] ÷ flat price.
The middle term spreads the discount gain (or premium loss) evenly across the years to maturity. It ignores the time value of money and shows up mostly in quotes for Japanese government bonds (JGBs) — worth recognizing, rarely the answer they're after.
The relationship that gets mis-ordered
Here's where points leak even when a candidate knows the definitions. For a conventional coupon-paying fixed-rate bond, with the rates put on a comparable annualized basis, the ordering flips with the bond's price:
- Discount bond (price < par): you also book a gain as it redeems at par, so coupon rate < current yield < YTM — YTM sits at the top.
- Premium bond (price > par): you take a loss as it redeems at par, so YTM < current yield < coupon rate — YTM sits at the bottom.
- Par bond (price = par): coupon rate = current yield = YTM. All three coincide.
(These are static orderings at a point in time, and they assume an actual coupon — a zero-coupon bond has no coupon rate or current yield to order.)
Why the measures get confused under pressure
Current yield is the one you can compute in five seconds without a calculator, so under time pressure it's the tempting grab — even when the question asked for YTM. To keep the discount/premium ordering straight, tie it to the gain or loss at maturity: a discount bond gains on its way to par, which lifts its full return above its coupon; a premium bond loses, which drags it below.
Quick reference
For a conventional coupon-paying fixed-rate bond:
| Bond | Ordering (low → high) |
|---|---|
| Discount (price < par) | coupon rate < current yield < YTM |
| Par (price = par) | coupon rate = current yield = YTM |
| Premium (price > par) | YTM < current yield < coupon rate |
One line to carry in: for a discount bond, coupon rate < current yield < YTM; for a premium bond that reverses; at par they meet. Read which yield the question actually wants before you reach for the fast one.
Same shape as the accrued vs. deferred trap — closely-related terms where picking the wrong one flips your answer. The fix is the same: anchor each to its meaning, not a rule.
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