CFA Level I Exam · Fixed-Income Instrument Features

Yield Measures and Coupon Structures for CFA Level I

Updated 7 October 2026 · Fact-checked

Current yield is annual coupon divided by price. Yield to maturity (YTM) is the single discount rate that equates a bond's price to its promised cash flows. Coupon structures set those cash flows: fixed, floating (reference rate + spread), zero, step-up and deferred. Solve YTM with your calculator's time value keys.

Understand Yield Measures and Coupon Structures

A bond is a loan. The issuer promises coupon payments and repayment of principal. How the coupons are set is the coupon structure. How much you earn from buying at a given price is a yield measure.

A fixed-rate bond pays the same coupon every period. A floating-rate note (FRN) pays a coupon that resets each period: reference rate + spread. The reference rate could be SOFR or Euribor. The spread (also called quoted margin) is fixed by the issuer's credit risk and does not change. Floating coupons keep the bond's price close to par, because the coupon follows market rates.

A zero-coupon bond pays no coupon. You buy at a discount and receive par at maturity. Your whole return is the gap between price and par. A step-up bond has a coupon that rises on preset dates by preset amounts, for example 3% for two years then 4%. The rise is scheduled, not tied to a reference rate. A deferred coupon bond pays no coupon for an initial period, then pays coupons, usually at a higher rate. Both deferred and step-up structures suit issuers who expect cash flow to improve.

Now yield. Current yield = annual coupon ÷ bond price. It ignores the gain or loss as the price moves to par, and it ignores reinvestment. Yield to maturity is the internal rate of return on a bond held to maturity. It assumes all payments are made on time and coupons are reinvested at the YTM. It includes coupon income plus the pull to par.

The link between them: a bond at a discount has coupon rate < current yield < YTM. A premium bond has coupon rate > current yield > YTM. A par bond has all three equal.

Key formulas to remember

Current yield: Current yield = annual coupon payment ÷ bond price; Use the flat (clean) price. Ignores capital gain or loss and time value.
Bond price from YTM: PV = Σ [PMT ÷ (1 + r)^t] + FV ÷ (1 + r)^N; r is the periodic yield. YTM is the r that makes PV equal the market price.
Periodic and annual yield (bond-equivalent basis): Annual YTM = periodic rate × number of periods per year; A semiannual bond quoted on a bond-equivalent basis: double the six-month rate. The result is a stated annual rate, not an effective annual rate.
Floating-rate note coupon: Coupon rate = reference rate + quoted margin; Reset date sets the rate. Coupon is usually paid in arrears, at the end of the period.
Zero-coupon bond price: Price = par ÷ (1 + r)^N; N is in periods. For semiannual compounding, N = years × 2 and r = annual rate ÷ 2.
Price relationships: Discount: coupon rate < current yield < YTM; Premium: coupon rate > current yield > YTM; At par all three are equal.

How to solve Yield Measures and Coupon Structures questions

Use this order for most questions on yields and coupon structures.

1Identify the coupon structure: fixed, floating, zero, step-up or deferred. This tells you what cash flows to expect.
2List the cash flows and their timing. For a step-up bond, use each period's own coupon. For a deferred bond, put zero in the early periods.
3Match the compounding to the payment frequency. Semiannual bonds: N = years × 2, periodic rate = annual rate ÷ 2.
4If the question asks for current yield, divide the annual coupon by the price. Stop there.
5If it asks for YTM, enter N, PV (negative), PMT and FV on your calculator, then compute I/Y. Multiply by periods per year for the annual figure.
6For an FRN, add the spread to the reference rate. Use the rate that applies to that period only.
7Check reasonableness: discount bond means YTM above coupon rate; premium means below.
8Pick the option that matches your answer and the stated basis (periodic or annual).

Quickest way: Rank first, calculate second

When to use it: Use when options are far apart or the question asks for a comparison, not a precise number.

Compare price with par. Below par: YTM > current yield > coupon rate. Above par: reverse.
Use these rankings to remove two of the three options before you calculate.
For FRN questions, the coupon is just reference rate + spread. No calculator is needed.
A zero-coupon bond pays everything at maturity, so, other things equal, its price is more sensitive to yield changes than a coupon bond of the same maturity.
If you must compute YTM, use the TVM keys. TI BA II Plus: 2nd CLR TVM; enter N, PV (negative), PMT, FV; then CPT I/Y. HP 12C: enter n, PV (negative), PMT, FV, then press i.

Common mistakes in Yield Measures and Coupon Structures

Using current yield as if it were YTM.
Both are called yields and current yield is quick to compute.
Fix: Current yield ignores the pull to par. Use it only when the question asks for it by name.
Forgetting to double N and halve the rate for semiannual bonds.
Candidates read the years and the annual coupon without checking the frequency.
Fix: Always write N = years × frequency and PMT = annual coupon ÷ frequency before keying in.
Reporting the six-month YTM as the annual YTM.
The calculator returns the periodic rate, and it looks like a complete answer.
Fix: Multiply by 2 for a semiannual bond-equivalent yield, unless the question asks for the periodic rate.
Treating a step-up coupon as floating.
Both coupons change over time.
Fix: A step-up changes on a preset schedule. A floating coupon changes with a reference rate. Only the floater has a spread over a reference rate.
Thinking the spread on an FRN moves with the market.
The whole coupon is described as variable.
Fix: The quoted margin is fixed at issue. Only the reference rate resets.
Leaving PV positive and FV positive on the calculator.
Cash flow signs are ignored.
Fix: Enter price as negative (outflow) and coupon and par as positive, or the calculator gives an error or the wrong sign.

Worked examples

Example 1

A 5-year, 6% annual-pay bond with par €1,000 trades at €950. Which is closest to its current yield? A) 6.00% B) 6.32% C) 6.67%

Show the solution

Annual coupon = 6% × €1,000 = €60.
Current yield = 60 ÷ 950 = 0.06316.
So current yield is about 6.32%.
Check: the bond is at a discount, so current yield must exceed the 6.00% coupon rate. Option A is out. 6.67% would need a price of €900.

Answer: B) 6.32%

Example 2

A 2-year bond has par $1,000 and pays a step-up coupon, annually: 4% in year 1 and 6% in year 2. A buyer pays $1,000 at issue. Which is closest to the YTM? A) 4.50% B) 4.98% C) 5.50%

Show the solution

Cash flows: year 1 = $40; year 2 = $60 + $1,000 = $1,060.
Set 1,000 = 40 ÷ (1 + y) + 1,060 ÷ (1 + y)².
Sense check: the average coupon is 5% and the bond is bought at par, so the YTM should be near 5%. This already makes 4.50% and 5.50% look too far away.
Solve exactly: let x = 1 ÷ (1 + y). Then 1,060x² + 40x − 1,000 = 0, so x = [−40 + √(1,600 + 4,240,000)] ÷ 2,120 = 0.95260. So y = 1 ÷ 0.95260 − 1 = 4.976%, which rounds to 4.98%.
Check at y = 4.98%: 40 ÷ 1.0498 = 38.10; 1,060 ÷ 1.0498² = 1,060 ÷ 1.10208 = 961.82; total = 999.92, which is within a few cents of 1,000 after rounding.
The YTM is slightly below the simple average coupon of 5% because the larger coupon is received later, and a heavier discount applies to that later payment. The single rate that fits the cash flows is therefore pulled a little below the 5% average.

Answer: B) 4.98%

Exam tips

Questions often ask you to rank coupon rate, current yield and YTM. Check price against par first and you can answer without a calculator.
Read the coupon structure closely. Step-up (scheduled) and floating (reference rate + spread) are often placed side by side as distractors.
A zero-coupon bond always trades below par before maturity when yields are positive. Use that to remove wrong options.
Check whether the answer is asked as periodic or annual. Option sets often include both.
With three options and no penalty for wrong answers, always answer. Use the ranking logic to cut one or two options, then pick.

Practice questions from Fixed-Income Instrument Features

Yield Measures and Coupon Structures: frequently asked questions

What is the difference between fixed-rate and floating-rate bonds?

A fixed-rate bond pays the same coupon until maturity. A floating-rate note pays a coupon that resets to a reference rate plus a fixed spread. Fixed-rate prices swing more when market rates change; floater prices stay near par.

How is a zero-coupon bond different from a step-up bond?

A zero-coupon bond pays no coupons and returns all its yield through the discount to par. A step-up bond pays coupons that rise on a set schedule. The step-up pays income along the way; the zero pays everything at maturity.

How do I calculate YTM on the CFA Level I exam?

Use the TVM keys on the TI BA II Plus or HP 12C. Enter N, price as negative PV, coupon as PMT and par as FV, then compute the periodic rate. Multiply by the number of periods per year for the annual bond-equivalent yield.

Why is current yield not a full measure of return?

It only counts coupon income against price. It ignores the gain as a discount bond rises to par, or the loss as a premium bond falls to par. It also ignores reinvestment of coupons.