Hi, I’m a little confused about how bond returns are calculated. Could someone please explain the fundamental difference between a bond’s coupon rate and its yield to maturity? When evaluating a bond on BondScanner, which metric should I focus on to understand my true return?
Simple way to think of it: Coupon is what the
company pays you every year. YTM is
what you actually earn if you hold the bond to maturity.
YTM is the figure you should look at for your “true return”, but be aware it assumes you can reinvest the coupon payments at the same YTM rate. That’s the math catch
This is an excellent question that goes right to the heart of fixed-income investing. Thanks to everyone who jumped in with such clear answers.
To synthesize the discussion, remember this simple takeaway:
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The Coupon Rate is the fixed amount the issuer promises to pay you annually, it never changes. Think of it as your cash flow.
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The Yield to Maturity (YTM) is your true estimated total return. It’s the most critical metric because it accounts for the price you pay today (discount or premium) and the effect of reinvesting those coupon payments.
Actionable Tip: When you’re using BondScanner to evaluate a purchase, focus on the YTM to determine if the bond meets your return goals, especially if you plan to hold it to maturity.
We appreciate you starting this fundamental discussion!