In plain language — The coupon says what the contract pays on face value. A yield connects payments with price and time. A different question requires a different yield measure.
Current yield compares annual coupon income with the current price. Yield to maturity (YTM) is the internal rate that equates full price with the present value of contractual cash flows through maturity. Yield to call (YTC) uses a stated early-redemption date and call price instead.
None of these measures is, by itself, a return that an investor is certain to realise.
Three questions, three numbers: YTM, current yield and yield to call
Current yield is a snapshot of coupon income:
Current yield = annual coupon / market priceIf a bond pays 4 per year and trades at 95 per 100 face value, current yield is about 4.21%. It ignores the movement toward redemption value, intrayear timing, reinvestment, default and options.
YTM solves, under stated calendar and conventions:
Dirty price = Σ cash flow_t / (1 + y/m)^(m×t)y is the yield being solved and m the compounding frequency. A bond below par can have YTM above current yield because YTM includes movement toward redemption value; above par, the reverse can occur. State compounding, day count, full price and settlement date.
YTC replaces final maturity with one call date and includes coupons until then plus the exercise price. A security may have several call dates and therefore several YTC values. Yield to worst is commonly the lowest among relevant contractual yield scenarios under a defined method. It does not include default and is not a guarantee of the worst possible economic outcome.
From screen value to operational check
Compare yields only on a consistent basis. A nominal semiannual yield and an effective annual yield are not directly interchangeable. Clean or dirty price, settlement, calendar, call price and accrued-interest treatment must also match.
Then separate three levels. Promised cash flows come from the contract. Expected cash flows may include call, prepayment or default probabilities. Realised return depends on actual prices, cash, reinvestment, costs and exit date. YTM primarily belongs to the first level. It assumes the specified contractual cash flows occur and compresses price into one rate.
If coupons are reinvested at different rates, the holding-period outcome changes. If the bond is sold early, the sale price matters. If the issuer fails to pay, the initial sequence does not occur.
Expert level: one IRR is not a curve
YTM compresses cash flows that a full valuation discounts across maturities. Two securities can share the same YTM and have very different cash-flow timing, duration, convexity, credit and liquidity. Zero curves, spread measures and scenario repricing provide the richer view; YTM remains useful as a quoting and comparison convention.
For a callable bond, YTC is a contractual scenario, not a call forecast. Exercise depends on rates, issuer spread, costs, constraints and terms. Preserve the date, call price and cash flows behind each number.
Common error — Ranking instruments only by the highest yield. A larger number may reflect lower price, credit risk, poor liquidity, subordination or an option held by the issuer.
Questions this page answers
Am I reading coupon, current yield, YTM or YTC? Does the measure include movement to par? Which call and call price does it use? Are cash flows promised or modelled? Which risks remain outside the number?