The Four Bond Yields and Why They Never Agree
A single bond can advertise several different yield figures at once, current yield, yield to maturity, yield to call, and picking the wrong one to compare against another bond leads directly to a bad purchase. This article works the actual math behind each, so you know exactly which one answers which question.
Why the yields diverge
Current yield is the simplest and least complete measure: the annual coupon divided by the bond's current market price. It answers only one narrow question, how much cash income does this bond throw off relative to what I'd pay for it today, and it completely ignores whether the bond is priced above or below its face value, meaning it ignores the gain or loss you will realize when the bond eventually matures or is called.
Yield to maturity (YTM) is the more complete figure: the single discount rate that makes the present value of every remaining coupon payment plus the final face-value repayment equal the bond's current price. It is, in effect, the bond's internal rate of return if held to maturity and if every coupon received along the way is reinvested at that same rate, an assumption worth flagging now because it rarely holds exactly in practice.
Yield to call (YTC) runs the identical calculation but substitutes the earliest call date and call price for the maturity date and face value, answering a different question: what would this bond return if the issuer exercises its right to redeem it early. For a callable bond trading above par, YTC is almost always lower than YTM, since the issuer is likely to call the bond precisely when doing so benefits them at the investor's expense, which is why professionals routinely quote yield to worst, the lower of YTM and YTC, as the conservative, decision-relevant figure. Realized yield is different again: it is not a projection at all but a backward-looking measure of what an investor actually earned, incorporating whatever rates coupons were genuinely reinvested at, which almost never exactly matches the YTM quoted at the time of purchase.
A fifth, closely related figure worth naming is yield to worst, mentioned briefly above but worth defining precisely: it is simply the lowest of all the yield outcomes a bond could plausibly produce across its various call dates and its final maturity date, computed by running the YTC calculation at every call date the bond permits and comparing all of those figures against the plain YTM to maturity. Professional fixed income desks quote yield to worst as their default headline figure specifically because it represents the most conservative, defensible promise embedded in the bond's price, rather than the most optimistic one an issuer's decisions might never actually deliver.
Two worked examples
The first example contrasts current yield with an approximate yield to maturity for a discount bond. Take a bond with a $1,000 face value, a 5% coupon rate ($50 a year), 10 years remaining to maturity, currently priced at $900. Current yield is simply $50 ÷ $900 = 5.56%. But this bond is trading at a $100 discount to its $1,000 face value, meaning a holder who keeps it to maturity captures that $100 gain on top of the coupons, something current yield ignores entirely. A widely used approximation for YTM captures this: approx. YTM = [coupon + (face − price) ÷ years] ÷ [(face + price) ÷ 2]. Plugging in: [$50 + ($1,000 − $900) ÷ 10] ÷ [($1,000 + $900) ÷ 2] = [$50 + $10] ÷ $950 = $60 ÷ $950 = 6.32%. The gap between the 5.56% current yield and the 6.32% approximate YTM, roughly three quarters of a percentage point, is entirely the effect of the bond's built-in price appreciation to par that current yield leaves out.
The second example shows why callable premium bonds need special handling. Take a bond with a $1,000 face value, a 7% coupon ($70 a year), callable in 3 years at $1,050, and currently priced at $1,080 (a premium, reflecting a period of falling rates since issuance). Using the same approximation formula but substituting the call date and call price for maturity and face value: yield to call = [$70 + ($1,050 − $1,080) ÷ 3] ÷ [($1,050 + $1,080) ÷ 2] = [$70 − $10] ÷ $1,065 = $60 ÷ $1,065 = 5.63%. Now compute the yield to maturity for the same bond, assuming 10 years remain to actual maturity: [$70 + ($1,000 − $1,080) ÷ 10] ÷ [($1,000 + $1,080) ÷ 2] = [$70 − $8] ÷ $1,040 = $62 ÷ $1,040 = 5.96%. Here, yield to call (5.63%) is lower than yield to maturity (5.96%), so the yield to worst, the conservative figure to actually rely on, is 5.63%. An investor who quoted this bond's 5.96% YTM as if it were guaranteed would be overstating the likely return, since a rational issuer paying 7% on debt when market rates have fallen is very likely to call the bond at the first opportunity and refinance more cheaply.
It is worth noticing what drove the gap in this example: the bond's premium price. A bond trading above its face value has more to lose if it gets called away at a lower call price than the price paid for it, which is exactly why yield to call tends to sit below yield to maturity specifically for premium bonds. A discount bond, trading below face value, generally shows the opposite pattern, since being called at a price above the current market price is actually a modest windfall for the holder, which is one more reason the approximate YTM formula used above, while a useful shortcut for a quick comparison, should be treated as an estimate rather than the exact figure a full present-value calculation, solved by iterating on the discount rate until the present value equals the price precisely, would produce.
What the evidence shows
The gap between quoted YTM and realized yield has been a persistent, well-documented feature of fixed income investing, driven mainly by the reinvestment assumption baked into the YTM calculation. YTM assumes every coupon received along the way gets reinvested at the same rate as the original YTM, an assumption that only holds if interest rates never move again for the life of the bond, which they virtually never do. When rates fall after purchase, reinvested coupons earn less than the original YTM assumed, so realized return comes in below the quoted figure; when rates rise, the opposite happens and realized return can exceed the original quote. This reinvestment risk grows with a bond's maturity and coupon size, since longer-maturity, higher-coupon bonds have more total coupon cash flow exposed to future reinvestment rates that are unknowable at purchase.
A related, extensively documented pattern concerns callable bonds specifically: issuers behave rationally as a group, and call exercise rates rise sharply during periods of falling interest rates, exactly when a bondholder would most want to keep collecting the above-market coupon. This is precisely why the fixed income industry converged on quoting yield to worst as a market standard rather than relying on either YTM or YTC in isolation: it forces the more conservative, and empirically more often realized, outcome into the headline number investors actually see.
The reinvestment assumption embedded in YTM has also been studied directly by comparing bonds' quoted YTM at purchase against the actual compound annual return investors realized after holding to maturity and genuinely reinvesting every coupon along the way. These comparisons consistently show a meaningful spread between the two figures whenever interest rates moved substantially during the holding period, larger for longer-maturity, higher-coupon bonds where more total cash flow depends on reinvestment, and smaller for shorter-maturity or lower-coupon bonds where less of the total return comes from coupons reinvested at an uncertain future rate. Zero-coupon bonds sit at one extreme of this spectrum: because they pay no coupons at all, they carry no reinvestment risk whatsoever, and their realized return exactly matches their quoted yield to maturity at purchase, a property that makes them a useful tool for investors who specifically want to lock in a known return to a known future date.
Using this in a real portfolio
For an individual investor building a bond ladder or ladder-like allocation, the practical rule is to make every comparison on a consistent basis, generally yield to worst, rather than mixing current yield quotes for one bond against YTM quotes for another. Brokerage platforms typically display several yield figures side by side; the one worth anchoring a decision on is the lowest defensible figure across YTM and YTC, since that is the return the market is effectively promising you under the least favorable, but plausible, scenario. For bond funds rather than individual bonds, the analogous figure is the fund's SEC-standardized yield, a regulated, comparable calculation, rather than its trailing distribution yield, which can be inflated by return of capital or unusually large recent payouts that will not repeat.
For a high-earning professional weighing individual bonds against a bond fund for a fixed income allocation, this yield vocabulary has a direct practical payoff: it lets you actually compare the two on equal terms. An individual bond's yield to worst and a bond fund's SEC yield are both forward-looking, standardized figures computed on a comparable basis, unlike a bond fund's trailing twelve-month distribution yield, which reflects whatever coupons and any realized gains the fund happened to pay out over the past year rather than what it is likely to yield going forward at current prices and rates. Anchoring every bond comparison on these standardized, forward-looking figures, rather than whatever number happens to be printed largest on a marketing page, is the single habit most likely to prevent an expensive yield-chasing mistake.
Actionable breakdown
- Choosing the right yield to compare
- Use yield to maturity to compare non-callable bonds.
- Use yield to worst for any callable bond above par.
- Avoid comparing bonds using current yield alone.
- Practical checks before buying
- Ask your broker or platform to quote yield to worst directly.
- Check the full call schedule, not just the first call date.
- Remember quoted YTM assumes reinvestment at that same rate.
- Comparing bond funds
- Use SEC yield, not trailing distribution yield.
- Match yield assumptions to your actual holding period.
- Don't chase a high current yield without checking why it's high.
Common pitfalls
Chasing current yield: an unusually high current yield often signals a bond trading at a steep discount because the market expects credit trouble, not a genuine bargain relative to safer alternatives.
Ignoring yield to worst on callable bonds: as the worked example shows, YTC can sit meaningfully below YTM for premium callable bonds; quoting the higher figure overstates the realistic return.
Assuming reinvestment happens at the original rate: YTM assumes every coupon is reinvested at the same rate quoted at purchase; if rates fall afterward, realized return will come in below the original YTM.
The bottom line
Always compare bonds using yield to maturity or, for callable bonds, yield to worst, never current yield alone, since only those figures capture the full return the market is actually promising you.
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