Yield to Maturity vs. Coupon Rate: What's the Difference?

A bond's yield to maturity (YTM) is the percentage rate of return for a bond, assuming that the investor holds the asset until its maturity date and receives all its remaining coupon payments and return of the principal (par value) at maturity. A bond's yield to maturity rises or falls depending on its market … See more

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Up to 3.2% cash back · If the price of the bond falls to $800, then the yield-to-maturity will change from 2% to 2.5% ( i.e., $20/$800= 2.5%). The yield-to-maturity only equals the coupon …

FAQs about Yield to Maturity vs. Coupon Rate: What's the Difference? Coupon?

Does yield to maturity include coupon rate?

Thus, yield to maturity includes the coupon rate within its calculation. YTM is also known as the redemption yield. A bond's yield can be expressed as the effective rate of return based on the actual market value of the bond. At face value, usually, when the bond is first issued, the coupon rate and the yield are the same numbers. ...

What is yield to maturity (YTM) & coupon rate?

The yield to maturity (YTM) is the estimated annual rate of return for a bond assuming that the investor holds the asset until its maturity date. The coupon rate is the earnings an investor can expect to receive from holding a particular bond. To complicate things the coupon rate is also known as the yield from the fixed-income product. ...

How does the yield to maturity of a bond change?

As the price of the bond changes, the yield to maturity of the bond will inversely change. Though bonds may be issued with variable rates tied to SOFR (which replaced LIBOR), most bonds are issued with a fixed rate, often causing the coupon rate and yield to differ. The yield to maturity (YTM) is an estimated rate of return. ...

What is a bond coupon rate?

The coupon rate is the annual interest amount that the bond owner will receive. To complicate things, the coupon rate may also be referred to as the yield from the bond. Generally, a bond investor is likelier to base a decision on an instrument's coupon rate. A bond trader is more likely to consider its yield to maturity. ...

When does yield to maturity become relevant?

The yield to maturity becomes relevant when an investor purchases the bond from the secondary market at a price not equal to par value. Take our investor who has a bond with a face value of $100,000 and a coupon rate of 3.25%. Assume he purchased the bond at a price of $91,480 on the secondary market. ...

When does yield-to-maturity equal the coupon rate?

The yield-to-maturity only equals the coupon rate when the bond sells at face value. The bond sells at a discount if its market price is below the par value. In such a situation, the yield-to-maturity is higher than the coupon rate. A premium bond sells at a higher price than its face value, and its yield-to-maturity is lower than the coupon rate. ...