A bond bought below or above face value yields more or less than its coupon. This calculator returns the current yield and the yield to maturity (YTM) — the total annualized return if held to maturity.
YTM accounts for the pull to par: a bond bought at 95 and repaid at 100 earns that 5-point gain on top of coupons. That is why YTM, not the coupon, is the comparison figure.
The calculation assumes coupons are reinvested at the same rate and the issuer does not default or call the bond early.
The reinvestment assumption is the weakest part of yield to maturity, and it matters most where it is largest. A high-coupon bond returns more cash along the way, and if rates have fallen by then that cash is reinvested at less than the YTM promised — so the realised return falls short of the quoted one.
Duration is the figure that says how much the price will move. A bond with a duration of seven falls roughly 7% for a one-point rise in yields, which is why long-dated bonds are volatile instruments rather than the safe holding they are often assumed to be.
Credit and call features sit outside the calculation entirely. A callable bond will be redeemed early precisely when rates fall and holding it was most valuable, capping the upside, and a yield far above comparable government debt is compensation for a default risk the arithmetic does not price.
Frequently asked questions
What is yield to maturity?
The total annualized return of buying at today's price and holding to maturity — coupons plus the gain or loss from the price converging to face value.
Why does YTM differ from the coupon rate?
Because you rarely pay exactly face value. Buy below par and YTM exceeds the coupon; buy above par and it is lower. The coupon only describes the cash payments.
What happens to bond prices when interest rates rise?
They fall, so that the fixed coupons match the new market yield. The longer the remaining maturity (duration), the bigger the price move.