A bond’s coupon rate is fixed at issue, but its actual yield moves with the price it trades at — buy the same bond below face value and the yield rises; buy it above face value and the yield falls.
How it works
Current yield divides the annual coupon payment by today’s price — a quick snapshot, but it ignores that a bond bought below face value also gains that difference back at maturity (or loses it, bought above face value). The approximate yield-to-maturity formula folds that gain or loss back in, averaged over the years remaining, which is why it diverges from current yield for any bond not trading at exactly face value.
Why “approximate”
The true yield to maturity requires solving the bond’s price equation for the discount rate numerically — there’s no closed-form algebraic solution, the same root-finding problem this site’s IRR calculator handles for cash flows. The approximation here is a standard, widely taught estimate that gets close without that numerical search.
How to use this calculator
- Enter the bond’s face (par) value — typically $1,000.
- Enter its current market price and its stated annual coupon rate.
- Enter the years remaining until maturity.
Frequently asked questions
Why is my current yield different from the coupon rate?
The coupon rate is fixed against the bond’s face value at issue; current yield is against today’s price, which has usually moved since then.
What does it mean if a bond trades above face value?
Usually that its coupon rate is above what similar new bonds now offer — investors pay a premium for the higher fixed payment, which lowers the yield they actually earn.
Is approximate YTM good enough to make a decision on?
It’s a solid estimate for comparing bonds quickly, but for a precise number — especially close to a decision — the exact, numerically solved yield is worth getting from a broker or bond-pricing tool.
Does this account for a bond being called early?
No — it assumes the bond is held to its stated maturity. A callable bond redeemed early can produce a meaningfully different actual return.
