CFA Level I Exam · Fixed-Income Cash Flows and Types

Yield Measures and Fixed-Income Market Segments Explained

Updated 7 October 2026 · Fact-checked

Current yield is annual coupon divided by price. Yield to maturity is the discount rate that equates the price to all promised cash flows. Bond markets are split by issuer type, credit quality (investment grade or high yield), maturity, currency and other features. Classify the bond first, then pick the right yield measure.

Understand Yield Measures and Fixed-Income Market Segments

A bond pays coupons and returns principal at maturity. A yield measure compresses this cash flow stream into one annual number you can compare across bonds.

Current yield is the simplest. It looks only at the coupon income you receive each year relative to what you pay. It ignores any gain or loss when the bond is redeemed at par, and it ignores the time value of money. So it is a rough income measure, not a full return.

Yield to maturity (YTM) is the internal rate of return on a bond bought at today's price and held to maturity. It assumes all coupons and principal are paid on time and that coupons are reinvested at the YTM. A bond priced below par has YTM above its coupon rate and current yield. A bond priced above par has YTM below its coupon rate. A bond at par has coupon rate = current yield = YTM.

Bond markets are also divided into segments. Common cuts are: issuer type (sovereign, quasi-government, supranational, corporate, securitized issuers); credit quality (investment grade is rated BBB-/Baa3 or higher, high yield is below that); maturity (money market is one year or less, capital market is longer); and currency (domestic, foreign, eurobonds). Other cuts include coupon type (fixed, floating, zero), and whether the bond is issued in the primary market or trades in the secondary market.

Why this matters: credit quality drives yield. Lower-rated bonds need higher yields to compensate for default risk. In the exam you will often be asked to place a bond in a segment, or to compare which yield measure is higher or lower for a premium or discount bond.

Key formulas to remember

Current yield: Current yield = Annual coupon ÷ Bond price; Use the annual coupon in currency terms. Use the price paid, not par. Ignores capital gain or loss.
Price-yield link to par: Price < par ⇒ YTM > current yield > coupon rate; Price > par ⇒ YTM < current yield < coupon rate; This ordering holds for a bond with a positive coupon and a remaining life of more than one period. At par all three are equal.
Bond price from YTM: PV = Σ [PMT ÷ (1 + r)^t] + FV ÷ (1 + r)^N; YTM is the r that makes PV equal the market price. r is per period; double a semiannual YTM for the bond-equivalent annual yield.
Investment grade cut-off: Investment grade: BBB- or higher (S&P, Fitch) or Baa3 or higher (Moody's); high yield: below; High yield is also called speculative grade or junk.

How to solve Yield Measures and Fixed-Income Market Segments questions

Use this method for any question on yield measures or market segments.

1Identify what is asked: a calculation (current yield, YTM) or a classification (segment).
2For a calculation, list the annual coupon (coupon rate × par), the price, the par value, the years and the payment frequency.
3For current yield, divide annual coupon by price. Do not use par in the denominator.
4For YTM, use the calculator: N = periods, PV = −price, PMT = coupon per period, FV = par, then CPT I/Y. Multiply by the periods per year.
5Sanity-check with the par rule: discount bond means YTM above coupon rate; premium bond means YTM below it.
6For classification, read the clue: who issues it, its rating, its maturity, its currency and its coupon type.
7Match each clue to the segment definition and pick the option that fits all clues.

Quickest way: Par rule shortcut

When to use it: When the question asks only which yield is higher or lower, or when you need to eliminate options before calculating.

Compare price with par. Price below par is a discount; above par is a premium.
Discount: rank YTM > current yield > coupon rate. Premium: reverse the order.
Cross out any option that breaks this ordering.
For a current yield question, compute coupon ÷ price and pick the closest option; numerical options are in ascending order, so check the middle one first.
For a segment question, anchor on the rating: BBB-/Baa3 or higher is investment grade, anything lower is high yield.

Common mistakes in Yield Measures and Fixed-Income Market Segments

Dividing the coupon by par to get current yield.
Coupon rate is quoted on par, so it feels natural to reuse par.
Fix: Current yield uses the market price in the denominator. Coupon rate uses par.
Thinking current yield equals total return.
It looks like a yield, so it seems complete.
Fix: Remember it ignores the gain or loss at maturity and the time value of money. Only YTM captures them (under its assumptions).
Getting the YTM ordering backwards for premium and discount bonds.
Students memorise without linking it to price.
Fix: A discount bond gives a capital gain, so its YTM must exceed its coupon rate. Premium means a capital loss, so YTM is lower.
Treating BB or BBB- as the same category.
The letters look similar.
Fix: BBB- is the lowest investment grade. BB+ and below is high yield.
Forgetting to double the semiannual YTM.
The calculator returns a per-period rate.
Fix: Multiply by periods per year to get the bond-equivalent yield, unless the question asks for an effective annual yield.
Calling every maturity under ten years 'money market'.
Short and money market get mixed up.
Fix: Money market instruments mature in one year or less. Longer debt is capital market debt.

Worked examples

Example 1

A 5% annual-pay bond with a par value of $1,000 trades at $950. What is its current yield, and how does its YTM compare? Options: A) 5.00% B) 5.26% C) 5.50%

Show the solution

Annual coupon = 5% × $1,000 = $50.
Current yield = 50 ÷ 950 = 0.05263, which is 5.26%.
The bond trades below par, so YTM is above the current yield and above the 5% coupon rate.
Option A is the coupon rate, not current yield. Option C, 5.50%, would need a price of about $909 (50 ÷ 0.055), not $950.
Option B matches the calculation.

Answer: Current yield = 5.26% (B); the YTM is higher than 5.26%.

Example 2

A 4-year, 6% annual-pay bond with par €1,000 is priced at €965. What is its approximate YTM? Options: A) 5.1% B) 6.0% C) 7.0%

Show the solution

Price = €965 is below par €1,000, so it is a discount bond.
A discount bond has a capital gain if held to maturity.
That gain adds to the coupon income, so YTM must exceed the 6% coupon rate. This rules out A and B.
Check with the calculator: N = 4, PV = −965, PMT = 60, FV = 1000, CPT I/Y gives about 7.0%.
Check by price: at 7%, the price is about €966, very close to €965.

Answer: C) YTM is about 7.0%.

Exam tips

Questions often test only the direction of the relationship between coupon rate, current yield and YTM. Use the par rule and skip the calculator.
Learn the rating boundary exactly: BBB-/Baa3 is the lowest investment grade.
Read for hidden clues in the stem: issuer name, currency and maturity tell you the segment.
With no penalty for wrong answers, always answer. Eliminate options that break the par ordering first, then guess among the rest.
On the BA II Plus, clear the TVM worksheet (2nd, FV) before each bond calculation and check that P/Y is set to 1.

Practice questions from Fixed-Income Cash Flows and Types

Yield Measures and Fixed-Income Market Segments in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Yield Measures and Fixed-Income Market Segments: frequently asked questions

What is the difference between current yield and yield to maturity?

Current yield is annual coupon divided by price and ignores capital gains or losses. Yield to maturity is the internal rate of return over the bond's life and includes coupons, the redemption value and time value of money.

What is the difference between investment grade and high yield bonds?

Investment grade bonds are rated BBB-/Baa3 or higher and carry lower default risk. High yield bonds are rated below that, carry more default risk and offer higher yields to compensate.

How are fixed-income markets classified?

Common cuts are issuer type, credit quality, maturity, currency and coupon structure. Primary versus secondary market is another way to split them.

When is current yield equal to YTM?

Current yield equals YTM when the bond trades at par, where coupon rate, current yield and YTM are all equal. It also holds for a perpetuity at any price. Otherwise they generally differ.