How it is calculated
Price = Σ C / (1 + y/f)^(f·t) + F / (1 + y/f)^(f·T)- C : each coupon payment, that is face value × coupon rate ÷ payments per year
- F : face value, the amount repaid at maturity
- y : yield to maturity, the number being solved for
- f : coupon payments per year (1 annual, 2 semi-annual, 4 quarterly)
- t : years until each coupon; T : years until maturity
A worked example
- 1A bond with ₹1,00,000 face value pays a 9% coupon semi-annually and matures in exactly 5 years.
- 2It is quoted at ₹96,000, a discount to face value.
- 3Coupon income is ₹4,500 every six months, ₹9,000 a year.
- 4At maturity you also receive ₹1,00,000 back, ₹4,000 more than you paid.
- 5Solving the pricing equation for y gives a yield to maturity of about 9.99%.
The coupon says 9%, the current yield says 9.38%, and the return you actually earn holding to maturity is close to 10%. Three different numbers describing the same bond, which is precisely why the label on the bond is not enough to judge it.
Yield to maturity vs current yield vs coupon rate
The coupon rate is fixed at issue and never changes. It tells you the rupee interest paid each year as a percentage of face value, and nothing about what you paid for the bond.
Current yield divides that annual coupon income by the price you actually paid. It corrects for buying at a discount or premium, but it ignores the fact that you will be repaid face value at maturity, so it overstates the return on a premium bond and understates it on a discount bond.
Yield to maturity accounts for everything: every coupon, the timing of each one, and the gain or loss when the principal is repaid. It is the internal rate of return of the whole holding, and it is what any comparison between bonds should use.
What yield to maturity quietly assumes
YTM assumes you hold the bond until it matures. Sell early and your realised return depends on the price on that day, which depends on where interest rates have moved since.
It also assumes every coupon is reinvested at the same yield. In practice you reinvest at whatever rates exist when each coupon lands, so a falling-rate environment leaves you below the advertised YTM even if you hold to maturity and the issuer pays in full.
And it assumes the issuer pays. YTM is a promised return, not an expected one. A bond yielding 14% is not a better deal than one yielding 9%; it is a bond the market believes is more likely to default. Read the yield alongside the credit rating, never on its own.
Why the same bond shows different yields on different sites
Yields differ by convention, not by arithmetic error. A yield can be compounded annually or at the coupon frequency, computed from the clean price or the dirty price, and use a 30/360 or actual/actual day count. Each choice moves the answer by a few basis points.
This calculator compounds at the coupon frequency and uses the clean price, which is how Indian corporate bond yields are conventionally quoted. When you compare a yield here against one elsewhere, check that both are on the same basis before concluding one source is wrong.
Frequently asked questions
What is a good yield to maturity for a corporate bond in India?+
There is no single good number, because yield is compensation for risk and for time. A AAA-rated bond maturing in two years will yield close to comparable government paper, while an A-rated bond maturing in seven years yields substantially more. Judge a yield against bonds of similar rating and similar maturity. A yield far above that group is the market pricing in a risk you have not spotted yet.
Why is my bond's yield higher than its coupon rate?+
Because you are buying it below face value. You collect the same coupons as someone who bought at par, and you also receive full face value at maturity, so the discount becomes extra return spread across the remaining life of the bond. Prices fall below par mainly when market interest rates have risen since the bond was issued, or when the market has become less confident about the issuer.
Does yield to maturity account for tax?+
No. YTM is a pre-tax figure. Interest from corporate bonds and NCDs is added to your income and taxed at your slab rate, so a 10% YTM is closer to 7% after tax for someone in the 30% bracket. Use the NCD returns calculator for the post-tax picture.
What is the difference between YTM and yield to call?+
Yield to call assumes the issuer redeems the bond at the earliest call date rather than at maturity. For a callable bond trading above par, yield to call is the more realistic figure, because an issuer will usually call and refinance when it is cheaper to do so. This calculator computes yield to maturity; if the bond is callable, treat the result as the optimistic case.