Current yield on a bond.

The three bond yields everyone confuses

Bond yield sounds like one number. It's actually three:

Coupon yield: the fixed interest rate printed on the bond when issued. A 100 bond with 5 annual interest has a 5% coupon yield. This never changes over the bond's life.

Current yield: annual interest / current market price. If that same bond trades at 90, current yield = 5/90 = 5.56%. Changes as market price changes.

Yield to maturity (YTM): the internal rate of return if held to maturity, accounting for both interest payments and any capital gain or loss from buying below/above par. YTM is the most useful single number for comparing bonds.

Confusing these produces bad investment decisions. The calculator above shows all three; the commentary below covers how to use them.

Why bond prices move inversely to interest rates

The core principle most investors don't fully internalise: when market interest rates rise, existing bond prices fall, because the existing bond's fixed coupon becomes less attractive relative to new bonds offering higher rates. A 100 bond paying 3% when new bonds pay 5% won't sell for 100 — it'll trade at a discount that pushes its effective yield (to the new buyer) toward 5%. This mechanism is what made 2022-2023 so painful for bond investors: rapid rate rises caused sharp price drops on existing bonds. Understanding this before buying bonds prevents the 2022 mistake of assuming bonds were safe because they usually are.

Gilt yields as the benchmark

Government bonds (gilts) are the low-risk benchmark for investors. Their yields set the floor against which every other investment is compared. Typical gilt yields by maturity (early 2025):

2-year gilt: 4.0-4.5%

10-year gilt: 4.3-4.7%

30-year gilt: 4.7-5.0%

Any investment should offer yield above these figures to compensate for its additional risk. A corporate bond at 5% when the comparable-maturity gilt yields 4.5% provides only 0.5% risk premium — not much if the company could default. An equity returning 8% when gilts yield 4.5% has a 3.5% risk premium — more meaningful. Gilt yields define the hurdle rate for other investments, and they move with the central bank policy decisions.

The yield curve's information content

The yield curve plots yields against maturity. Normal curve (upward-sloping): longer-maturity bonds yield more, compensating investors for locking up capital longer. Inverted curve (downward-sloping): short-term yields exceed long-term yields — typically a signal of expected recession. Flat curve: little differentiation across maturities, usually in transitional economic periods.

The country yield curve has been unusual during 2023-2024 — inverted for parts of the period as markets expected rate cuts from the 5.25% the central bank peak. A persistently inverted curve is one of the most reliable recession indicators in economic history, though timing from inversion to recession varies widely (6-24 months typically).

Credit rating and yield spread

Corporate bonds yield more than gilts because they carry default risk. The extra yield is the "credit spread". Typical credit spreads over gilts:

AAA-rated corporate: 0.3-0.8% above gilts. Lowest default risk.

AA: 0.6-1.2% above.

A: 1.0-2.0% above.

BBB (lowest investment grade): 1.5-3.0% above.

High-yield / junk (below BBB): 3-8% above, significantly wider in stressed periods.

A 7% yield on a bond might be extraordinary (AAA at 7% would be unprecedented) or mediocre (high-yield at 7% is typical in risk-on markets). Without the credit rating context, the headline yield is misleading.

Duration: the sensitivity measure

Duration measures how much a bond's price moves when rates change. A bond with 5-year duration falls roughly 5% in price for every 1-percentage-point rise in rates. Longer-maturity bonds typically have longer duration. 10-year gilts have roughly 9-year duration; 30-year gilts have roughly 20-year duration. For a 1% rate rise:

10-year gilt: approximately 9% price drop.
30-year gilt: approximately 20% price drop.

This is why 30-year gilts lost 30-40% during 2022's rapid rate rise — not because the country government became riskier, but because the pricing arithmetic demanded those drops to match new market rates. Investors holding to maturity recover full principal; those who need to sell during rate rises realise the loss.

Reinvestment risk on yield-to-maturity

YTM calculations assume all coupons are reinvested at the same YTM rate. This is often wrong — you reinvest each coupon at whatever rate prevails at that time. If rates fall over the bond's life, you reinvest coupons at lower rates, reducing your actual realised return below the stated YTM. If rates rise, you reinvest at higher rates, beating YTM. YTM is accurate for the "hold-to-maturity, reinvest-at-YTM" case and approximate otherwise. For precision on realised returns, look at Total Return — a bond fund's actual performance over a period — rather than headline YTM.

bond yield differences

treasuries and gilts serve similar roles but price differently. 10-year treasuries typically yield slightly higher than 10-year gilts — but the gap varies with interest rate differentials between the the central bank and the central bank. When the central bank is ahead in the rate cycle (as in 2023-2024), yields exceed yields. When the the central bank is ahead, yields can exceed. For investors, gilts are the natural benchmark; for global investors, the yield differential factors into currency hedging decisions.

When high yield actually means high risk

The most dangerous bonds are those marketing very attractive yields for what sound like safe investments. A corporate bond at 8-10% when AAA trades at 5% is implicitly BBB-or-below. A regulated structured product yielding 10%+ is concealing either significant credit risk or significant market risk in derivatives. Historical defaults in investment-grade are below 1% annually; in high-yield, 3-5% in normal years, spiking to 15%+ in stressed periods. Before buying a high-yielding bond, check the credit rating. Before buying a structured product, read the term sheet and understand what happens in the scenarios you'd rather not think about.

What this calculator shows

The tool computes coupon yield, current yield, and yield-to-maturity for a given bond based on face value, coupon rate, market price, and time to maturity. It doesn't model credit risk, reinvestment risk variations, or tax treatment. For a specific bond analysis, use YTM as the primary yield comparison; adjust for credit rating and duration risk before committing capital.