Bond yield is a measure of the return an investor receives from holding a bond. The two most common yield measures are the current yield and yield to maturity (YTM). Current yield is simply the annual coupon payment divided by the bond's current market price: Current Yield = Annual Coupon / Market Price. It tells you what percentage return you earn from coupon payments alone at the current price.

Yield to maturity is a more comprehensive measure that accounts for coupon payments, the difference between the purchase price and face value, and the time remaining until the bond matures. The approximate YTM formula used here is: YTM ≈ (C + (FV - P) / n) / ((FV + P) / 2), where C is the annual coupon, FV is face value, P is price, and n is years to maturity. This approximation is close to the exact YTM for most bonds.

When a bond trades below its face value (at a discount), the YTM will be higher than the coupon rate because the investor gains both coupon income and price appreciation at maturity. Conversely, bonds trading at a premium (above face value) have a YTM lower than the coupon rate. Understanding these yield dynamics is essential for comparing bonds with different coupons, prices, and maturities on an equal footing.