A bond is a loan you make to a company or a government. In return, you get regular interest payments called coupons, and your money back on a set date.
The catch is that bonds are bought and sold at prices that move around, so the 5 percent coupon on the label is rarely the return you actually earn. This bond calculator takes the price you pay and works out the number that matters, the yield to maturity, along with the current yield and the total profit if you hold the bond to the end.
How to use the Bond Calculator#
- Enter the face value. This is what the bond repays at maturity. 1,000 is common.
- Enter the coupon rate. The yearly interest as a percentage of face value.
- Enter the years to maturity. Count the time left, not the original term.
- Enter the price you pay. Below face value is a discount, above is a premium.
- Pick the coupon frequency. Most bonds pay twice a year.
- Read the result. You get the yield to maturity and the other measures of return.
Three yields, three meanings#
- Coupon rate. What the bond pays each year as a share of face value. It’s fixed when the bond is issued and doesn’t change.
- Current yield. The yearly coupon divided by the price you pay. It ignores the gain or loss when the bond matures.
- Yield to maturity (YTM). The full annual return if you hold to the end, counting the coupons and the difference between what you paid and the face value. It’s the figure to compare bonds on.
A worked example#
A bond has a face value of 1,000, a 5 percent coupon paid twice a year, and 10 years to run. You buy it for 950.
- Coupon payment: 1,000 × 5% ÷ 2 = 25 every six months
- Current yield: 50 ÷ 950 = 5.26 percent
- Yield to maturity: about 5.66 percent, or 5.74 percent as an effective annual yield
- Total profit if held to maturity: 500 in coupons plus 50 from the discount, which is 550
The YTM is higher than the 5 percent coupon because you paid less than face value, and you collect that gap at the end. Pay 1,050 instead and the YTM drops to about 4.38 percent. At 1,000, the YTM equals the coupon rate, 5 percent.
How YTM is found#
There’s no simple formula for yield to maturity. It’s the single rate at which all the future payments, discounted back, add up to the price you pay. The calculator finds it by repeated trial, narrowing in until the sum matches. You can see the same idea in reverse in the bond price calculator, which starts from a yield and finds the price.
What YTM assumes#
- You hold the bond until it matures.
- The issuer makes every payment on time.
- You can reinvest each coupon at the same yield, which is rarely quite true.
- The bond isn’t callable, meaning the issuer can’t repay it early.
The calculator also assumes you buy on a coupon date, so there’s no accrued interest to add. Real quotes often include it.
Before you buy a bond#
A high yield is often a sign of higher risk, not a bargain. Check who’s borrowing, how likely they’re to repay, and how the bond’s price would move if interest rates changed. Tax, fees and the spread between buying and selling prices all eat into the figure you see here. This tool is for learning and comparing, not investment advice.
Frequently asked questions#
It’s the rate that makes the present value of all coupons and the face value equal to the bond’s price. It needs trial and error, which the calculator does for you.
Current yield is the yearly coupon divided by the price. Yield to maturity also counts the gain or loss when the bond matures, so it’s the fuller measure.
Because you paid less than face value. You earn the coupons and also the gap between the price and the amount repaid at maturity.
It’s the amount the issuer repays at maturity, also called par value. It’s also what the coupon is calculated from.
No. Higher yields usually come with more risk, such as a greater chance the issuer can’t repay.
It is the annual return you would get if you buy the bond at today’s price, hold it until it matures and receive all the coupons and the face value. It is the single rate that makes the present value of those payments equal the price. It assumes coupons are reinvested at the same rate and that the issuer does not default.