Introduction
A bond may display a coupon rate such as 7% or 8%, but that does not necessarily represent the return earned by an investor who purchases the bond in the secondary market.
The investor's actual return depends on several factors:
face value;
coupon rate;
purchase price;
remaining maturity;
redemption value; and
timing of coupon payments.
This creates three important concepts:
Coupon Yield
Current Yield
Yield to Maturity (YTM)
They measure different aspects of bond return.
The most important conceptual distinction is:
Coupon depends on face value.
Current yield depends on market price.
YTM considers market price plus all remaining contractual cash flows up to maturity.
The current 2026 IIBF CAIIB BFM syllabus includes Securities Market Products under Module C – Treasury Products. The Institute's current treasury curriculum also specifically includes coupon and YTM concepts, bond pricing, and yield calculations.
RBI's Government Securities Market Primer similarly identifies coupon yield, current yield, and YTM as the three commonly used yield measures for bonds.
Learning Objectives
After studying this topic, you should be able to:
calculate coupon income from face value and coupon rate;
distinguish coupon rate from current yield;
calculate current yield from annual coupon income and market price;
understand the meaning and calculation logic of YTM;
distinguish exact YTM from approximate YTM;
understand premium, par, and discount bond yield relationships;
identify the correct price and maturity inputs in numerical questions; and
avoid common CAIIB calculation mistakes.
Start with the Four Basic Inputs
Before attempting any bond numerical, identify these four values.
Face Value
Face value, or par value, is the amount on which the contractual coupon is calculated and normally the amount repaid at maturity for a plain bond.
Coupon Rate
The coupon rate is the contractual annual interest rate on the bond's face value.
It normally does not change merely because the bond's market price changes.
Market Price
Market price is what an investor currently pays for the bond.
It may be:
equal to face value;
above face value; or
below face value.
Remaining Maturity
This is the period remaining until redemption.
Remaining maturity is particularly important for YTM because YTM considers all cash flows from the purchase date until maturity.
Coupon Amount
The coupon amount is the contractual interest payable on the bond.
Annual Coupon = Face Value × Coupon Rate
This calculates the annual contractual interest based on the bond's face value.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
A change in secondary-market price does not change this contractual coupon amount for an ordinary fixed-rate bond.
For example, if a fixed-rate security later trades at a premium or discount, its annual coupon remains determined by the original face value and coupon rate.
Coupon Yield
RBI defines coupon yield as the coupon payment expressed as a percentage of face value.
Coupon Yield (%) = Annual Coupon ÷ Face Value × 100
This measures the contractual coupon relative to face value.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
For an ordinary fixed-rate bond, the coupon yield is effectively the stated coupon rate.
Therefore, if the bond's market price changes:
coupon yield does not change merely because of the price movement;
current yield changes; and
YTM changes.
What Is Current Yield?
Current Yield measures annual coupon income relative to the price paid for the bond.
RBI describes current yield as coupon payment expressed as a percentage of the bond's purchase price.
Current Yield (%) = Annual Coupon ÷ Market Price × 100
This measures annual coupon income relative to the investor's current purchase price.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
The denominator is the important part:
Coupon Yield → Face Value
Current Yield → Market Price
Why Current Yield Changes with Price
Suppose coupon income remains unchanged.
If the bond price falls, the investor pays less to obtain the same annual coupon.
Therefore:
Price ↓ → Current Yield ↑
If the bond price rises:
Price ↑ → Current Yield ↓
This is another expression of the inverse relationship between bond price and yield.
RBI confirms that when market interest rates or yields rise, bond prices fall, and when yields decline, bond prices rise.
Coupon Yield vs Current Yield
Situation | Bond Price | Coupon Yield vs Current Yield |
|---|---|---|
Bond at par | Price = Face Value | Coupon Yield = Current Yield |
Bond at premium | Price > Face Value | Current Yield < Coupon Yield |
Bond at discount | Price < Face Value | Current Yield > Coupon Yield |
This relationship can often solve a CAIIB conceptual question without detailed calculation.
Limitation of Current Yield
Current yield is useful, but it is incomplete.
It considers:
annual coupon income; and
current purchase price.
It does not fully consider:
gain or loss between purchase price and redemption value;
remaining maturity;
timing of all future cash flows; or
reinvestment of coupon income.
RBI specifically notes that current yield considers only coupon interest and ignores other sources of return affecting the investor.
Therefore, YTM provides a more comprehensive measure.
What Is Yield to Maturity?
Yield to Maturity, or YTM, is the expected rate of return implied by the current bond price if the bond is held until maturity and its contractual cash flows are received according to the assumed terms.
RBI explains YTM as the discount rate that makes the present value of the bond's future cash flows equal to its current price. In other words, it is the bond's internal rate of return under the YTM assumptions.
YTM therefore considers:
current market price;
remaining coupon payments;
redemption value; and
remaining time to maturity.
This makes YTM more comprehensive than either coupon yield or current yield.
YTM Calculation Logic
The conceptual bond-pricing relationship is:
Bond Price = Present Value of All Remaining Coupon Payments + Present Value of Redemption Amount
YTM is the discount rate that makes those present values equal to the current market price.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
Unlike current yield, exact YTM normally cannot be obtained simply by dividing one amount by another when multiple future cash flows remain.
RBI notes that manual YTM calculation involves a trial-and-error process, while financial calculators or spreadsheet functions can determine it more easily.
Approximate YTM
For simple examination estimation, an approximate YTM may be obtained using:
Approximate YTM (%) = [Annual Coupon + {(Face Value − Purchase Price) ÷ Years to Maturity}] ÷ [(Face Value + Purchase Price) ÷ 2] × 100
This provides an approximation by combining annual coupon income with the annualised capital gain or loss.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
Why Purchase Price Matters for YTM
Assume a bond eventually redeems at face value.
Bond Bought Below Face Value
The investor receives:
coupon income; and
a capital gain as price moves from purchase price toward redemption value.
Therefore, YTM becomes higher than the coupon yield under normal plain-vanilla conditions.
Bond Bought Above Face Value
The investor receives coupon income but ultimately suffers a reduction from the premium purchase price toward the lower redemption value.
Therefore, YTM becomes lower than the coupon yield.
Bond Bought at Face Value
There is no maturity-related premium loss or discount gain.
Therefore:
Coupon Yield = Current Yield = YTM
for a conventional bond at par under standard assumptions.
Premium Bond Relationship
A bond trades at a premium when:
Market Price > Face Value
For a conventional fixed-rate bond:
Coupon Yield > Current Yield > YTM
This ordering occurs because:
the relatively high coupon makes the bond attractive;
the investor pays more than face value;
current yield is reduced because coupon is divided by the higher purchase price; and
YTM is still lower because the investor must also absorb the premium's movement toward redemption value.
Discount Bond Relationship
A bond trades at a discount when:
Market Price < Face Value
For a conventional fixed-rate bond:
YTM > Current Yield > Coupon Yield
The investor:
receives the contractual coupon;
pays less than face value; and
gains from the movement toward redemption value if held to maturity.
Par Bond Relationship
When:
Market Price = Face Value
then for a conventional plain bond:
Coupon Yield = Current Yield = YTM
These three relationships are exceptionally useful for CAIIB.
Bond Position | Yield Relationship |
|---|---|
Premium | Coupon Yield > Current Yield > YTM |
Par | Coupon Yield = Current Yield = YTM |
Discount | YTM > Current Yield > Coupon Yield |
YTM and Remaining Maturity
YTM must use the remaining maturity, not automatically the bond's original maturity.
Suppose a ten-year bond has already been outstanding for several years.
An investor buying it today will receive only the remaining:
coupon payments; and
maturity principal.
Therefore, the relevant YTM calculation uses the period from the present settlement date to maturity.
Coupon Frequency
Government securities in India generally pay coupon interest half-yearly.
For exact YTM calculation, coupon frequency matters because cash flows occur more than once per year.
RBI's YTM illustration for Indian Government bonds uses a frequency of 2, reflecting semi-annual coupon payments, and identifies the applicable Government-securities day-count basis in its spreadsheet methodology.
Therefore, in an exact YTM problem, do not automatically treat:
annual coupon = one annual cash flow
when the bond actually pays coupons twice a year.
The annual coupon amount may need to be split according to the payment frequency specified in the question.
Clean Price and Dirty Price
Government securities are generally quoted using a clean price.
Clean price excludes accrued interest.
The actual settlement amount may include accrued interest, producing the dirty price.
Conceptually:
Dirty Price = Clean Price + Accrued Interest
RBI explains that accrued interest is added to clean price to arrive at dirty price or total settlement consideration.
Why This Matters in Yield Questions
Do not automatically substitute total settlement consideration into a simple current-yield question if the question specifically provides a quoted market price for yield calculation.
Likewise, for exact settlement-date YTM, use the methodology and price convention required by the question.
The key is to identify whether the value provided is:
quoted clean price;
dirty price;
total consideration; or
purchase price specified for the calculation.
Accrued Interest
For Indian Government securities, RBI's primer states that the day-count convention used for accrued interest is 30/360.
Accrued interest represents coupon earned from the last coupon date up to the relevant settlement period.
Do not confuse:
Accrued Interest → settlement calculation
with
Current Yield/YTM → return measurement
They are related to bond valuation but answer different questions.
Numerical Decision Process
Before calculating, use this sequence.
Step 1: Identify What Is Asked
Is the question asking for:
annual coupon;
coupon yield;
current yield;
approximate YTM;
exact YTM; or
relationship among yields?
Step 2: Identify Face Value
Coupon is calculated on face value.
Step 3: Identify Purchase or Market Price
Current yield and YTM depend on the price paid.
Step 4: Identify Remaining Maturity
This matters for YTM.
Step 5: Identify Coupon Frequency
Check whether coupons are:
annual;
half-yearly; or
another stated frequency.
Step 6: Check Redemption Value
Do not automatically assume a value different from the one stated in the question.
Step 7: Determine Premium, Par or Discount
This gives an immediate reasonableness check for the expected yield relationship.
Step 8: Calculate with Sufficient Precision
Avoid excessive rounding during intermediate calculations.
Reasonableness Checks
A good numerical answer should also make conceptual sense.
If Price Is Above Face Value
Expect:
YTM < Coupon Yield
If Price Equals Face Value
Expect:
YTM = Coupon Yield
under standard plain-bond assumptions.
If Price Is Below Face Value
Expect:
YTM > Coupon Yield
If Bond Price Rises but Coupon Is Unchanged
Expect:
current yield to fall; and
YTM generally to fall.
If Bond Price Falls
Expect:
current yield to rise; and
YTM generally to rise.
If your calculator gives the opposite result, recheck the inputs.
Current Yield Is Not Total Return
A common mistake is to assume:
Current Yield = Investor's complete return
That is incorrect.
Current yield ignores any capital gain or loss associated with redemption.
For example, conceptually:
buying below face value creates potential maturity gain;
buying above face value creates potential maturity loss.
YTM incorporates this effect through the present value of all remaining contractual cash flows.
Therefore, current yield is a quick income measure, while YTM is a broader return measure.
YTM Is Not Guaranteed Realised Return
YTM is often described as the return obtained if the bond is held to maturity, but an important qualification is necessary.
Actual realised return can differ because:
coupon payments may be reinvested at different rates;
the security may be sold before maturity;
the issuer's cash flows may differ in a credit-risky instrument;
transaction costs may apply; and
taxes may affect the investor.
RBI notes that bond returns can arise from coupon payments, capital gain/loss, and reinvestment income.
Therefore, YTM is a standardised yield measure based on specified assumptions, not a guarantee of actual future investment performance.
Practical Treasury Application
Assume treasury is choosing between two bonds.
One bond offers a higher coupon rate but trades at a substantial premium.
Another has a lower coupon but trades below face value.
Looking only at coupon rate can produce the wrong decision.
Treasury should compare:
YTM;
remaining maturity;
duration;
credit quality;
liquidity;
cash-flow requirements; and
expected interest-rate movement.
The bond with the higher coupon does not necessarily offer the higher investment return.
CAIIB Exam Focus
Coupon is calculated on face value.
Do not calculate the contractual coupon on market price.
Current yield is calculated using market/purchase price.
This is the most important denominator distinction.
Current yield ignores maturity gain or loss.
YTM considers the full set of remaining contractual cash flows and current price.
RBI defines YTM as the discount rate equating the present value of future bond payments with the current price.
For a premium bond:
Coupon Yield > Current Yield > YTM.
For a par bond:
Coupon Yield = Current Yield = YTM.
For a discount bond:
YTM > Current Yield > Coupon Yield.
Price and YTM move inversely.
Remaining maturity, not original maturity, is relevant for a current purchaser.
Coupon frequency matters in exact YTM calculations.
Approximate YTM is not identical to exact YTM.
Current yield is not the same as total return.
YTM is a standardised return measure, not a guarantee of realised return.
Common Exam Traps
Trap 1: Coupon Rate Is Calculated on Market Price
Incorrect.
Coupon rate applies to face value.
Trap 2: Current Yield Uses Face Value
Incorrect.
Current yield uses the current purchase or market price.
Trap 3: Coupon Yield Changes Every Time Market Price Changes
Incorrect.
For a fixed-rate bond, coupon yield remains linked to the contractual coupon and face value.
Trap 4: Current Yield and YTM Are the Same
Incorrect.
Current yield considers only annual coupon relative to price. YTM considers all remaining contractual cash flows and maturity.
Trap 5: A Premium Bond Has YTM Above Its Coupon Rate
Normally incorrect.
For a conventional premium bond:
Coupon Yield > Current Yield > YTM
Trap 6: A Discount Bond Has YTM Below Its Coupon Rate
Normally incorrect.
For a conventional discount bond:
YTM > Current Yield > Coupon Yield
Trap 7: A Bond with the Highest Coupon Must Have the Highest YTM
Incorrect.
YTM also depends on:
purchase price;
maturity;
redemption value; and
cash-flow timing.
Trap 8: Original Maturity Is Always Used in YTM
Incorrect.
Use the bond's remaining maturity for a current purchase.
Trap 9: Exact YTM Is Simply Coupon Plus Capital Gain Divided by Price
Incorrect.
Exact YTM is the discount rate that equates the present value of all remaining contractual cash flows with current price.
Trap 10: Approximate YTM and Exact YTM Must Be Identical
Incorrect.
The approximation provides an estimate.
Trap 11: Current Yield Includes Capital Gain at Maturity
Incorrect.
Current yield focuses on coupon income relative to current price.
Trap 12: YTM Is the Return Guaranteed to Be Actually Earned
Incorrect.
Actual realised return can differ because of reinvestment rates, early sale, credit events, transaction costs and other factors.
Trap 13: A Half-Yearly Coupon Bond Can Always Be Treated as Having One Annual Cash Flow
Incorrect for exact valuation.
The timing and frequency of cash flows affect YTM.
Trap 14: Higher Bond Price Produces Higher YTM
Incorrect, other things remaining unchanged.
Price ↑ → YTM ↓
Price ↓ → YTM ↑
Memory Technique
Remember the three yield measures as F-P-F:
Coupon Yield → Face value
Current Yield → Price
YTM → Full cash flows
For premium and discount bonds, remember:
Premium = C > CY > YTM
Discount = YTM > CY > C
where:
C = Coupon Yield
CY = Current Yield
And the final rule:
Price UP → Yield DOWN
Price DOWN → Yield UP