What are all the bond yield measures and how do I pick the right one?

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AcadiFi · Accepted Answer

Bond yield measures fall into three buckets. (1) Income-only measures — current yield (annual coupon / price); ignores capital gain/loss and reinvestment. (2) Total-return-to-horizon measures assuming held to a specific date — yield to maturity (YTM), yield to call (YTC), yield to put (YTP); all solve for the IRR that equates PV of cash flows to price. Yield to worst (YTW) = the lowest of YTM and all YTC/YTP — the conservative measure quoted on callable bonds. (3) Convention and frequency adjustments — bond-equivalent yield (BEY; semi-annual compounding convention), effective annual yield (EAY; true annualized compounded yield), and after-tax yield. Example: A $1,000 par 7% semi-annual callable bond trades at $1,060, matures in 8 years, callable at $1,020 in 3 years. YTM ≈ 6.0%, YTC ≈ 5.2%, YTW = 5.2%. Current yield = $70/$1,060 = 6.60%. BEY already = 6.0%; EAY = (1.03)^2 − 1 = 6.09%. If the investor is in a 32% tax bracket, after-tax YTM = 6.0% × (1 − 0.32) = 4.08% (if taxable). Rule-of-thumb: use current yield only for quick income snapshot; use YTW for conservative valuation of callables; use EAY to compare across compounding conventions (mortgages, CDs); use after-tax to compare munis to taxables.

What are all the bond yield measures and how do I pick the right one?

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