Bond Coupons and Yields: What Your Purchase Price Changes

A 4% fixed coupon tells you how the bond's interest is calculated. It does not, by itself, tell you what return you would earn at today's purchase price. The coupon rate uses face value as its base; your own calculation starts with what you pay. Source: FINRA, Bonds.

The easiest way to see the difference is to keep every promised payment unchanged and move only the price tag. Our example uses a $100 face-value bond, so a 4% annual coupon means $4 of interest. Whether the buyer pays $98 or $102, that promised $4 stays the same.

Start with the dollars going out and coming back

Suppose the bond has exactly one year left. At the end of that year, it makes its only remaining payment: $4 of interest plus $100 of principal, or $104 altogether. At a $98 purchase price, the net gain would be $6; at $102, it would be $2. The unchanged $4 coupon clearly cannot describe both outcomes on its own.

These are hypothetical teaching assumptions, not a real security, current quote, or minimum purchase size. Purchase occurs just after the preceding coupon date, with no accrued interest; the stated price is the entire outlay. We assume payment as promised, no early redemption, taxes, fees, or other cash flows, and no interim coupon needing reinvestment.

Real-world conventions matter. Treasury notes and bonds pay every six months, and secondary-market trades can require the buyer to pay accrued interest. Our annual, single-payment example deliberately avoids those complications; it is not an actual Treasury pricing model. Sources: TreasuryDirect, Understanding Pricing and Interest Rates, FINRA, Bonds.

Three percentages, three different questions

The coupon rate answers how much annual interest is promised relative to face value: $4 ÷ $100 = 4%. Current yield instead divides annual coupon dollars by the current price; it measures the income-to-price ratio and changes as the market price changes. Source: FINRA, Bonds: coupon and current yield.

Yield to maturity (YTM) includes the scheduled coupons and principal repayment, along with their timing. Formally, it is the discount rate that equates those promised future cash flows with the purchase price. Source: FINRA, Understanding Bond Yield and Return.

Here is how the three measures compare for our one-year example. Each row promises the same $104 at year-end; the percentages below are our calculations under the stated assumptions.

Below, at, or above face value are all possible bond prices. TreasuryDirect explains these pricing relationships, but the particular $98, $100, and $102 prices here are invented for this exercise. Source: TreasuryDirect, Understanding Pricing and Interest Rates.

Follow the discounted and premium purchases

For the $98 buyer, current yield is $4 ÷ $98 ≈ 4.08%. The one-year maturity calculation is ($104 − $98) ÷ $98 ≈ 6.12%: $4 of coupon income plus $2 from buying below the $100 repayment amount.

For the $102 buyer, current yield is $4 ÷ $102 ≈ 3.92%. The maturity result falls to ($104 − $102) ÷ $102 ≈ 1.96%, because the $4 coupon is partly offset by the $2 premium that is not recovered when principal is repaid.

Paying exactly $100 makes all three measures 4.00% in this model. Notice that the $104 payment is not $104 of profit: $100 of it is returned principal. These one-year returns equal YTM only because of the cash-flow pattern we specified.

A second year changes the calculation

Now consider a separate scenario: the same $100 face value and $4 annual coupon, a $98 purchase price, but two years remaining. The promised receipts are $4 after one year and $104 after two, so the annual rate y satisfies 98 = 4 ÷ (1 + y) + 104 ÷ (1 + y)².

Solving gives approximately 5.08%. The calculation keeps the two payment dates separate rather than adding the gains and treating them as a one-year return. It is an annual-payment model, not a claim about the quotation or annualization convention used for every bond.

What could make the realized outcome different?

The issuer might fail to pay on schedule. A callable bond could also be redeemed before its original maturity, while selling early means accepting the price actually available then. These are among the credit, call, and interest-rate risks described by SEC Investor.gov, Bonds FAQs.

For a bond with interim coupons, the rates available when reinvesting those payments also affect the ending value. YTM does not guarantee that value or your realized total return; the usual calculation also excludes your taxes and transaction costs. Source: FINRA, Understanding Bond Yield and Return.

Our table is therefore not a reason to prefer every discounted bond. Its higher yield comes from a specific purchase price and a fixed set of assumed payments. An actual comparison also needs the issuer, maturity, redemption terms, and risks.

Before relying on a number on the quote screen

Write down the payment schedule: each coupon amount and date, followed by the principal repayment. Then check your total purchase outlay, including how the quoted price, accrued interest, and any fees fit together on the trade confirmation.

Identify whether the displayed percentage is a coupon rate, current yield, or YTM. Check the payment frequency, annualization convention, and any early-redemption provision before comparing two quotes. This article explains those measures; it does not recommend a particular bond or allocation.

For the separate question of when you will need the money, see our cash-layering guide. A maturity calculation is useful only when you also understand the cash-flow assumptions behind it.

Check your understanding

A different premium: Keep every assumption of the one-year model, but pay $101. Current yield is $4 ÷ $101 ≈ 3.96%; this example's YTM is ($104 − $101) ÷ $101 ≈ 2.97%. The coupon rate remains 4%.

An early exit: In a separate scenario, pay $98 and sell six months later for total proceeds of $95. Assume those proceeds include any accrued interest, no separate coupon has been received, and taxes and fees are omitted. The holding-period return is ($95 − $98) ÷ $98 ≈ −3.06%.

That is a six-month loss, not an annualized rate. It also is not the original 6.12% maturity scenario: the investor sold before receiving the cash flow that scenario required.

Disclaimer: This is general financial education, not personal investment, tax, or legal advice. All bond prices and cash-flow examples are hypothetical; they are not current market quotes, allocation recommendations, or guaranteed returns. Prepared and sources checked October 26, 2026.