I’ve been seeing ‘coupon rate’ and ‘YTM’ on BondScanner’s bond pages, and I always thought they were the same thing. If the coupon is 9%, then my return is 9%, right? Can someone explain the difference?
I get where you’re coming from. They’re not the same, though.
The coupon rate is what the issuer promised to pay when the bond was originally issued. For example, with a Rs 1,000 bond and a 9% coupon, you’d get Rs 90 per year, no matter what the bond costs today in the market.
Now, YTM — or yield to maturity — is a bit more real-world. It’s the return you actually get if you buy the bond at today’s market price and hold it till maturity. It considers the coupon payments, the difference between what you pay today and the Rs 1,000 you’ll get back when the bond matures, and the time left to maturity.
For example, if you buy the bond for Rs 950, you’re getting that Rs 50 discount, which adds to your return. So your YTM will be slightly above 9%. On the other hand, if you buy at Rs 1,050, the YTM will be lower than 9%.
Always look at YTM when comparing bonds. It’s the more accurate figure for actual returns.
wait so i’ve been looking at the coupon rate thinking that’s what i’ll get? that explains why my returns have been slightly off from what i expected. so the YTM on BondScanner is what i’ll actually earn if i hold to maturity?
Exactly, Manu. The YTM is the number that matters. The coupon rate is like a starting point but YTM accounts for the market price. If you’re buying a bond at face value, the coupon rate and YTM will be nearly identical. But when you buy in the secondary market, that’s when the difference really shows.
Got it. So if I buy at face value and hold it to maturity, the YTM should be pretty close to the coupon rate, right?
Yes, Arav. YTM is almost the same as the coupon rate if you’re buying at face value. Any small difference comes from compounding assumptions. But in practical terms they are pretty much the same when buying at par.