Bond Yield
Educational only, not financial advice.
Bond yield is the return an investor earns from a bond, expressed as a percentage. Yield and bond price move in opposite directions: when a bond's price falls, its yield rises, and when its price rises, its yield falls.
The word "yield" covers several different measures. Check which one you are looking at. Comparing different measures can make one bond look better than it is.
Why it matters
- Yield reflects both the bond's fixed coupon payment and the price you pay for it today.
- Rising interest rates tend to push yields up and the prices of existing bonds down.
- Higher-yielding bonds usually carry more credit risk. A high yield is often the market's way of pricing that risk, not a free extra return.
- Yield is not a guaranteed personal return. Fees, taxes, price changes and reinvestment rates all affect what you actually earn.
The main types of yield
| Measure | What it tells you | Limitation |
|---|---|---|
| Coupon yield (coupon rate) | The annual interest set when the bond was issued, as a percentage of face value | Ignores the price you actually pay |
| Current yield | Annual coupon divided by today's market price | Ignores any gain or loss when the bond matures |
| Yield to maturity (YTM) | The overall rate earned if you buy at today's price and hold to maturity | Assumes all payments are made and coupons are reinvested at the same rate |
| Yield to call (YTC) | The same idea as YTM, but assuming the issuer repays early on the first call date | Only relevant for callable bonds |
| Yield to worst (YTW) | The lower of YTM and YTC | A conservative estimate, still not a promise |
FINRA notes that YTM and YTC are estimates, because interest rates change and reinvesting every coupon at the same rate is very unlikely. Your real total return is only known when you sell the bond or it matures.
Worked example: price and yield
Take a bond with a $1,000 face value that pays a $40 coupon each year. Its coupon rate is 4%.
- If you buy it at $1,000, your current yield is $40 ÷ $1,000 = 4.00%.
- If market rates rise and the bond's price falls to $900, a new buyer still gets $40 a year, so the current yield is $40 ÷ $900 = about 4.44%.
- That buyer also gets $1,000 back at maturity after paying $900, so their yield to maturity is higher again than 4.44%.
The reverse also holds. FINRA's own example: a $1,000 bond paying $45 a year has a 4.5% coupon yield. If its price rises to $1,030, the current yield drops to about 4.37%.
Why prices and yields move in opposite directions
A bond's coupon is fixed. If new bonds start paying more because rates went up, nobody will pay full price for your older, lower-paying bond. Its price has to drop until its yield is competitive with the new bonds. When rates fall, the opposite happens and older bonds with higher coupons become worth more.
How much a price moves depends largely on the bond's duration. FINRA gives a rule of thumb: for each one percentage point change in interest rates, a bond's price moves roughly its duration in percent the other way. A bond with a duration of 10 would be expected to lose about 10% if rates rose one point. If you hold a bond to maturity and the issuer pays, these price swings do not change the payments you receive.
Yield vs total return
Yield describes income relative to price. Total return adds up everything: coupons received, interest earned on reinvested coupons, and the change in the bond's price, minus fees and taxes. A bond fund can show a 4% yield and still have a negative total return in a year when rates rise sharply, because the price drop outweighs the income.
Real yield
To see what a bond earns after inflation, subtract the inflation rate from the return. FINRA's example: a 5% return in a year of 3% inflation is a real return of about 2%. A bond yielding less than inflation loses purchasing power even though the dollar value goes up. See real return.
Yield and credit risk
Bonds rated below BBB by S&P and Fitch, or below Baa3 by Moody's, are considered speculative grade, also called high-yield or junk bonds. They pay higher yields because the issuer is more likely to default. FINRA also points out that high-yield bonds tend to move in the same direction as stocks, so they may not give a stock-heavy portfolio the diversification people expect from bonds.
The yield curve
The yield curve plots the yields of government bonds against their time to maturity. Normally it slopes upward, with longer bonds paying more to compensate for tying up money longer. When the curve is flat, investors get little extra yield for taking on longer bonds and the extra interest rate risk that comes with them.
A Canadian note on accounts
Bond interest earned in a non-registered account is taxable each year. Inside a TFSA, the CRA says interest, dividends and capital gains are generally tax-free, including on withdrawal. That is one reason some investors place bond holdings in registered accounts. Your own situation may differ, so check the CRA guidance or a tax professional.
How beginners use this
Use yield to compare similar bonds or bond funds, not as a retirement promise. When comparing, make sure you are comparing the same measure (YTM with YTM, not current yield with YTM), check the credit rating, and look at duration so you know how much the price could move if rates change. For funds, the fact sheet usually lists both yield and duration.
Related terms
Learn more
Sources
- FINRA: Understanding Bond Yield and Return
- FINRA: Interest Rate Changes and Duration
- FINRA: What to Know About High-Yield Bonds
- Canada Revenue Agency: What is a TFSA
Reviewed by Greg Parsons. Links checked October 14, 2026. Educational only, not financial advice.