Coupon vs. Yield: The Key Difference
One idea makes the rest click: the coupon is the fixed interest rate printed on the bond, while the bond yield is the return you actually get based on what you pay for the bond today. The coupon is set in stone. The price you pay is not, and when the price changes, your real return changes with it. Here's the difference at a glance:
The One-Sentence Version
The coupon tells you the dollars a bond pays each year. The yield tells you what those dollars are worth to you given the price you paid. Same payment, different price, different return.
The Gift-Card Way to Picture It
Imagine a gift card that's loaded to pay out $50 every year, forever. That $50 is fixed — it's the coupon. Now, what's your real return? That depends entirely on what you paid for the card.
Same Card, Different Price
If you pay $1,000 for a card that pays $50 a year, your real return is $50 ÷ $1,000 = 5%.
If a friend sells you the same card for $800, you still collect $50 a year — but now your real return is $50 ÷ $800 = 6.25%. You paid less for the same payout, so the payout means more to you. That's a yield in everyday terms.
Why Yield Goes Up When Price Goes Down
This is the part that trips people up, so go slow. A bond's coupon payment is a fixed number of dollars every year. The yield measures those fixed dollars against the price you paid. When the price drops, the same dollars are being divided by a smaller number, and the yield rises. When the price climbs, those same dollars are divided by a bigger number, and the yield falls.
The Seesaw
Think of price and yield as two ends of a seesaw, tied together by the fixed coupon. Because that coupon never changes, any move in the price forces the yield the other way: when the price end goes down, the yield end goes up, and vice versa. The dollar payment stays the same — all that shifts is how good a deal it is at the price you pay.
Current Yield: The Simple Version
The most basic yield measure is current yield, and the formula is about as simple as it gets: take the annual coupon in dollars and divide by the current price.
Worked Example
You're looking at a bond with a $1,000 [[face-value|face value]] and a 4% coupon. That coupon pays $40 a year (4% of $1,000).
If the bond is selling today for $800, your current yield is $40 ÷ $800 = 5%.
Notice what happened: the coupon is still 4%, but because you'd pay only $800 for it, the yield you'd actually earn is closer to 5%. The discount you paid lifted your real return.
| What you pay | Annual coupon | Current yield |
|---|---|---|
| $800 (a discount) | $40 | $40 ÷ $800 = 5.0% |
| $1,000 (face value) | $40 | $40 ÷ $1,000 = 4.0% |
| $1,200 (a premium) | $40 | $40 ÷ $1,200 = 3.3% |
Same bond, same $40 coupon — the price you pay sets your yield. Stylized figures for illustration.
Yield to Maturity: The Fuller Picture
Current yield is handy, but it ignores one thing: at maturity, you get the full $1,000 face value back, even if you only paid $800. That extra $200 is part of your return too. Yield to maturity (YTM) folds in both the coupon payments and that gap between your purchase price and the face value you'll collect at the end.
Keep It Light
The exact YTM math involves a bit of compounding, so most people let a calculator or their broker do it. The takeaway is simpler: YTM is the more complete measure because it counts both the interest and the price gap. Current yield gives you a quick estimate, and YTM fills in the rest.
Why People Watch Yields, Not Coupons
A bond's coupon is frozen the day it's issued — it never changes again. The yield, by contrast, moves every time the price moves, which means it reflects today's reality. That's why news and markets talk about yields rising or falling: the yield is the live signal that tracks what a bond is really worth right now, while the coupon is just a historical label.
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