§ 01
| Number | What it answers | When it matters |
|---|---|---|
| Coupon rate | How much interest the bond contractually pays each year, as a percentage of face value. Locked at issuance, never changes. | Useful for cash-flow planning only. Tells you the dollar amount of coupons; tells you nothing about total return. |
| Current yield | Annual coupon dollars divided by today's price. The income yield if you bought and held for exactly one year and the price did not move. | Decent quick proxy for income, but ignores the price you will receive at maturity. Overstates return for premium bonds, understates for discount bonds. |
| Yield to maturity (YTM) | The annualized total return if you buy at today's price and hold to maturity, blending coupons plus any price-to-face gain or loss. | The right number to compare bonds across coupon rates and maturities. The standard quote in any serious bond conversation. |
§ 02
Current Yield = Annual Coupon / Bond Price
§ 03
| Bond status | Price vs face | Coupon vs market rate | Yield ordering |
|---|---|---|---|
| Discount bond | Price < face (trading below $1,000) | Coupon < market rate | Coupon < Current Yield < YTM |
| Par bond | Price = face ($1,000) | Coupon = market rate | Coupon = Current Yield = YTM |
| Premium bond | Price > face (trading above $1,000) | Coupon > market rate | Coupon > Current Yield > YTM |
§ 04
A premium bond looks generous on its coupon — a 6% coupon when the market only offers 4% feels like a deal. The trap is that you are paying above face to get that 6%, and at maturity you only get back face value, not what you paid. The price-drop-to-par over the remaining life of the bond eats into the coupon income. That is why YTM (which captures the pull-to-par) is the only honest comparison number; coupon and even current yield can paint a premium bond as more attractive than it actually is.
§ 05
Look up a single corporate bond on FINRA's free bond center (finra-markets.morningstar.com/BondCenter) or your brokerage's bond screener. Note its coupon, its current price (often quoted as a percent of par — '98.50' means $985 per $1,000 face), and its YTM. Confirm: if YTM > coupon, the bond is at a discount; if YTM < coupon, it is at a premium. The relationship is mechanical, not opinion.
§ 06
Five questions · AI feedback
Sit with the ideas.
A 5-year bond with a $1,000 face value and 3% coupon (paying $30/year) trades today at $920. Which of the following is the most useful number for deciding whether to buy this bond, and why?
Why: