YTM vs. current yield — what's the actual difference and when does each matter?

Great question — these two yield measures serve different purposes and confusing them is a common exam trap.

Current Yield is the simplest measure:

Current Yield = Annual Coupon / Current Market Price

It only captures the income component — it ignores any capital gain or loss from the bond converging to par at maturity.

Yield to Maturity (YTM) is the total return measure. It's the discount rate that equates the bond's price to the present value of all future cash flows (coupons + principal). YTM captures:

1. Coupon income
2. Capital gain/loss (if bought at premium or discount)
3. Reinvestment income (assumed at the YTM rate)

Example:

A bond with a 7% coupon trades at $950 with 5 years to maturity (face = $1,000).

• Current yield = $70 / $950 = 7.37%
• YTM calculation requires solving: $950 = $70/(1+r)^1 + $70/(1+r)^2 + ... + $1,070/(1+r)^5
• Using a financial calculator: YTM = 8.26%

Notice YTM > Current Yield > Coupon Rate for a discount bond. This relationship always holds:

When to use each:

• Current yield: Quick income comparison between bonds. Useful for income-focused investors who care about cash flow, not total return.
• YTM: The standard comparison metric. Use it whenever you need a single number representing total expected return assuming you hold to maturity and reinvest coupons at the YTM.

Exam tip: The CFA exam often gives you a discount bond and asks which yield measure is highest — the answer is always YTM for discount bonds. Know the ranking by heart.

Practice more yield comparison problems in our CFA Level I question bank.