Yield Measures — The Bond World’s Report Card (with feelings)

Hook: Why yields are the thing you actually need to care about

Remember how in Equity Investments we obsessed over P/E and free cash flow because they told you whether a stock was worth the hype? Fixed income has its own set of gossip metrics: yield measures. They tell you how much money a bond will probably whisper back into your portfolio over time. If Bond Valuation Techniques taught you how to price a bond, and Types of Fixed Income Securities introduced the cast of characters (corporates, governments, munis, zeroes), yields tell you the personality, incentives, and potential traps of each actor.

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What is a "yield" anyway? (Short and useful)

• Coupon (nominal) rate: the contractually stated annual interest as a percent of par. Not a yield — it’s a promise. (You met this in "Types of Fixed Income Securities".)
• Yield: the investor's earned return, based on the bond's price and cash flows. It reflects market reality, not just the bond's CV.

Think of coupon rate as the bond's dating profile blurb, and yield as what happens when you actually go on the date.

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The main yield measures (and how to not get fooled)

1) Current Yield — the 'quick-and-dirty' yield

• Formula: Current Yield = Annual Coupon Payment / Price
• Pros: Easy to compute; gives a snapshot of income return.
• Cons: Ignores capital gains/losses and time value of money. Bad at telling the full story for bonds selling away from par.

Example:

Coupon = $60/year on a $1,000 par bond (6%)
Price = $950
Current Yield = 60 / 950 = 6.316%.

2) Yield to Maturity (YTM) — the main event

• Definition: The single discount rate that makes the present value of all future cash flows equal to the bond's price. Equivalent to the IRR on the bond if held to maturity.
• Formula (conceptual):

Price = Σ_{t=1}^{N} (Coupon_t) / (1 + YTM)^t  +  Par / (1 + YTM)^N

• Practical reality: No closed-form for typical coupon bonds — you solve for YTM numerically (financial calculator or Excel's RATE/IRR).
• Useful: Accounts for coupons, capital gain/loss, time value.

Quick approximation (handy in exams):

YTM ≈ [Annual Coupon + (Par - Price) / n] / [(Par + Price)/2]

3) Yield to Call (YTC) and Yield to Worst

• YTC: Solve the YTM formula assuming the bond is called at the call date and call price. Important for callable bonds — the issuer might yank the bond if rates fall.
• Yield to Worst: The lower of YTM and any relevant YTCs. Conservative — tells you the worst legally possible yield if issuer acts like a mean ex.

4) Real Yield vs Nominal Yield

• Nominal yield: The YTM quoted in the market (not inflation-adjusted).
• Real yield: Adjusted for inflation. Exact: (1 + nominal) / (1 + inflation) - 1. Approx: nominal - inflation.
• Relevant for TIPS and macro-sanity checks.

5) Zero-coupon yields and spot rates

• Zero-coupon yields (spot rates) are yields on pure zero-coupon instruments. They form the backbone of the yield curve and are used to price other bonds via bootstrapping.
• Reminder: In Bond Valuation Techniques you priced coupon bonds by discounting cash flows; now realize each cash flow can be discounted at a different spot rate.

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Yield spreads — the gossip between bonds

Yields are rarely looked at in isolation. We compare yields: spreads tell us perceived credit/risk/hysteria.

• G-spread: Yield difference between a corporate bond and government benchmark at same maturity (in bps).
• I-spread: Uses swap rates as benchmark. Popular in corporate and OTC markets.
• Z-spread: A constant spread added to each point of the zero curve to equate price — useful for mortgage-backed and complex bonds.

Why spreads matter: They quantify credit risk, liquidity premium, and market stress. Wider spreads = investors asking for more compensation.

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Conventions and gotchas (CFA loves these)

• Coupon frequency matters: Semiannual compounding is common for U.S. corporates — yields quoted may be bond-equivalent yields or effective annual yields depending on context.
• Clean price vs dirty price: Market prices usually quoted clean (excluding accrued interest), but yield math uses the full dirty price.
• Accrued interest: If you buy mid-period, you pay seller accrued interest. Don't confuse coupon rate with immediate cash you get.

Ask yourself: Are you comparing apples with apples? If one yield is semiannual BEY and another is APR, you need to convert.

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Quick cheat-sheet table

Measure	Formula (concept)	Best use	Big weakness
Coupon (nominal)	coupon% * par	Contractual cash flow	Not investor return
Current yield	coupon / price	Quick income check	Ignores capital gains and time value
YTM	IRR of cash flows	Holistic expected return if held to maturity	Assumes reinvestment at YTM & hold to maturity
YTC / YTW	YTM to call / min(YTM,YTCs)	For callable bonds, worst-case yield	Multiple call dates complicate calc
Real yield	(1+nom)/(1+infl)-1	Inflation-adjusted return	Depends on inflation estimate

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Mini worked example (because numbers make people believe)

You buy a 5-year, $1,000 par bond, 6% coupon (annual), price = $920. What's current yield and approximate YTM?

• Current yield = 60 / 920 = 6.52%
• Approx YTM ≈ [60 + (1000 - 920)/5] / [(1000 + 920)/2] = [60 + 16] / 960 = 76 / 960 = 7.92%

Interpretation: The bond yields more than its coupon because you bought it at a discount — you’ll earn coupon income plus capital gains as it converges to par.

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Closing (the part where I make you remember something)

Yields are your map and your compass in fixed income. Coupon rates are the advertisement; yield measures are the actual itinerary. If you remember one thing: YTM is the go-to holistic measure, but always check call features, compounding conventions, and whether you're comparing apples to apples via spreads or quoted conventions.

Expert take: ‘‘Yield numbers alone are like wallpaper patterns — pretty, but context (duration, credit, callability, inflation) is the furniture that really determines whether it fits your living room.’'

Final question to ponder (and exam fodder): If two bonds have the same YTM but different coupons and maturities, do they have the same risk? (Spoiler: no — duration and credit differences will tell a fuller story.)

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Versioned for the next step: once you’re comfortable here, we’ll overlay duration, convexity, and yield curve strategies — now that you know what yields mean, you’ll learn how sensitive they are to rate drama.