How to Calculate Bond Yield and Why It Matters
30 April 2025 · Sachin Gadekar
Understanding bond yield is key to making smart fixed-income investments. Here's a step-by-step breakdown of how to calculate it and why it matters.
How to Calculate Yield on Bonds and Why It Matters
When it comes to fixed-income investing, yield is the north star. Whether you're a seasoned HNI or a first-time investor exploring bonds through digital platforms like TapBonds.com, understanding how to calculate bond yield is essential. It helps you assess potential returns, compare opportunities, and avoid misleading headline rates.
In this article, we'll break down:
What bond yield really means
The different types of yields
How to calculate them
Why it matters for your investment decisions
How TapBonds simplifies the process
📌 What Is Bond Yield?
Bond yield refers to the return you earn from holding a bond. It's expressed as a percentage of the bond's cost or face value, and it reflects either:
The interest (coupon) income you receive, or
The total return you earn if you buy the bond at a discount or premium
Example: If you buy a bond for ₹1,000 and receive ₹80 in interest annually, your yield is 8%.
📊 Types of Bond Yields Explained
| Type of Yield | Definition |
|---|---|
| Coupon Yield | The bond’s annual coupon (interest) divided by face value |
| Current Yield | Annual coupon divided by the current market price |
| Yield to Maturity (YTM) | Total return if held to maturity, accounting for purchase price & interest |
| Yield to Call (YTC) | Yield assuming the bond is called before maturity (for callable bonds) |
🧮 How to Calculate Bond Yields (Step-by-Step)
Let’s look at a few yield calculations to demystify the math.
1. Coupon Yield Coupon Yield = (Annual Coupon Payment / Face Value) × 100
Example:
A bond with ₹1,000 face value paying ₹80 annually:
Coupon Yield = (80 / 1000) × 100 = 8%
2. Current Yield
Current Yield = (Annual Coupon Payment / Market Price) × 100
Example:
If you buy the same bond at ₹950:
Current Yield = (80 / 950) × 100 ≈ 8.42%
This tells you what you're actually earning on your investment today.
3. Yield to Maturity (YTM)
YTM is more comprehensive. It considers:
Purchase price
Coupon payments
Time to maturity
Redemption value
It’s calculated using a trial-and-error or financial calculator because the formula involves solving an equation like:
Current Price = Σ [Coupon / (1 + YTM)^t] + [Face Value / (1 + YTM)^n]
🧠 Don't worry: Platforms like TapBonds calculate YTM for you automatically when you explore bond listings.
📈 Why Bond Yield Matters
✅ 1. Helps You Compare Bonds
A 7% YTM bond may actually offer better real returns than an 8% coupon bond bought at a premium. Yield lets you compare apples to apples.
✅ 2. Reveals True Return
Just seeing the coupon rate isn’t enough. Current yield or YTM gives a more accurate picture—especially if you’re buying the bond in the secondary market.
✅ 3. Supports Portfolio Planning
Yield helps you allocate between
Short-term vs. long-term bonds
High-yield vs. investment-grade
Government vs. corporate bonds
✅ 4. Assists in Risk Evaluation
Higher yield often means higher risk. Evaluating yield against rating, liquidity, and maturity helps balance risk and reward.
🔍 Real-Life Bond Yield Example
Let’s say you find this bond on TapBonds.com:
Face Value: ₹1,000
Coupon: 9%
Price: ₹970
Maturity: 5 years
Coupon Yield = 9%
Current Yield = (90 / 970) × 100 ≈ 9.28%
YTM = Calculated on platform ≈ 9.6%
This shows you're actually earning more than the coupon suggests, thanks to buying below par.
🚀 How TapBonds Helps You Track Yield
At TapBonds, we simplify bond investing for both retail and HNI investors by:
💡 Displaying YTM and current yield for each bond
🔍 Allowing filters based on yield, rating, tenure, and issuer
📲 Providing real-time price and performance data
📘 Offering educational resources just like this one
Instead of spreadsheets and manual calculations, you get a dashboard view of your actual yield potential across various bonds.
🧠 FAQs
Q1. Why is my bond’s YTM higher than the coupon rate?
Because you likely bought it below face value. That discount adds to your return over time.
Q2. What is a good yield for bonds in 2025?
In India, 7–10% YTM is considered attractive for high-rated corporate bonds. Always compare with risk and inflation.
Q3. Does higher yield mean better investment?
Not always. High yield often means higher risk. Always check the issuer’s creditworthiness.
Q4. How do I know which yield matters most?
Use coupon yield for basic understanding, current yield for short-term plans, and YTM for long-term holding decisions.
Q5. Can I calculate yield manually?
Yes, but it’s complex for YTM. TapBonds shows all key yield metrics so you don’t have to.