What does a bond's coupon actually earn you?
You already know the price-yield seesaw. This course is about measuring it properly — and the first thing to fix is that the word "yield" is used for at least four different numbers. Confusing them is the most common mistake in fixed income.
Three numbers, three different questions
- Coupon rate — the fixed percentage of face value the issuer pays. A €1,000 bond with a 5% coupon pays €50 a year, every year until it matures, regardless of what the bond trades at. It tells you the cash, not your return, because you probably didn't pay €1,000 for it.
- Current yield — the annual coupon divided by what you actually paid. It answers: how much cash income does this price buy me right now?
- Yield to maturity (YTM) — the return you earn holding to maturity if the issuer pays in full and you can reinvest each coupon at the same rate. Both conditions are doing real work, and the next lesson is about the second one.
The arithmetic
Current yield = annual coupon ÷ market price.
Take that 5% bond — €50 a year on €1,000 of face value:
- Trading at €900: 50 ÷ 900 = 5.56%
- Trading at €1,000 (par): 50 ÷ 1,000 = 5.00%
- Trading at €1,100: 50 ÷ 1,100 = 4.55%
Same bond, same coupon, three different current yields — because current yield is a fact about your entry price, not about the bond.
Where it misleads
Current yield ignores the pull to par. Buy at €900 and hold to maturity and the issuer hands back €1,000 — a €100 gain that current yield simply does not count. Include it and the real return-to-maturity of that bond is closer to 7.5%, not 5.56%. Buy at €1,100 instead and you're booking a €100 loss over time, so the true return is below 4.55%.
It also ignores the timing of the cash and what happens to coupons after they arrive. Two loose ends the next two lessons tie off.
That gives you a reliable ordering worth memorising:
- Discount bond (price below par): coupon rate < current yield < YTM
- Par bond: all three are equal
- Premium bond (price above par): coupon rate > current yield > YTM
That ordering holds for bonds with a positive coupon. A zero breaks it without breaking anything: its coupon rate and current yield are both 0% while its YTM is positive, so the strict inequality becomes an equality at the front. Within positive-coupon bonds, a set that violates the ordering is an arithmetic error rather than a discovery.
What it is still good for
Current yield is a cash-flow measure, and as such it's honest and useful. An endowment asking "how much spendable income lands in the account this year per euro invested?" is asking exactly the question current yield answers. The trouble starts only when someone reads it as a return.
Try it now
- The US Treasury publishes par yields: the coupon a new Treasury of each maturity would need in order to be issued at exactly 100. The newest curve is below. Take its 10-year yield as your coupon, put the bond at a price of 96, and divide one by the other. That number is the current yield; write it next to the coupon rate.
- Is it trading at a discount or a premium? Using the ordering above, predict whether its YTM is above or below the current yield before the next lesson shows you how to compute it.
- Say the distinction out loud: "the coupon rate is about the face value, the current yield is about my price, and neither one counts the pull to par."
A note on what we do here. EODHD Academy teaches how the machinery works. Nothing here is a recommendation to buy or sell anything, and nothing here forecasts interest rates. Bonds and numbers are illustrations — rounded on purpose so you can follow the arithmetic.