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CFA Level I Exam · Yield and Yield Spread Measures for Fixed-Rate Bonds

Bond Yield Measures: Current Yield and Yield to Maturity

Updated 7 October 2026 · Fact-checked

Current yield is annual coupon income divided by the bond's price. Yield to maturity (YTM) is the discount rate that makes the present value of all remaining cash flows equal the price, so it is the bond's internal rate of return. Solve for the periodic rate, then multiply by periods per year for the quoted yield.

Understand Bond Yield Measures: Current Yield and YTM

A bond is a stream of promised cash flows: coupons and a final principal payment. Its price is the present value of those cash flows. The discount rate you use is the yield. If you know the yield, you can find the price. If you know the price, you can find the yield.

Yield to maturity is the single rate that sets the present value of all remaining coupons and principal equal to the market price. That makes it the internal rate of return on the bond. It assumes you hold to maturity, the issuer pays every cash flow in full and on time, and you reinvest coupons at the YTM itself.

Periodicity matters. A bond paying coupons twice a year is priced with a periodic rate, which is the annual yield divided by 2, over twice as many periods. The quoted annual yield is usually the periodic rate multiplied by the number of periods per year. This is the street convention, also called the bond-equivalent or stated annual yield. It assumes cash flows arrive on their scheduled dates, ignoring weekends and holidays. It does not compound within the year, so it understates the true annual return.

To compare bonds with different payment frequencies, convert to an effective annual yield: (1 + periodic rate)^m − 1. A 6% semiannual bond basis yield has a periodic rate of 3% and an effective annual yield of 6.09%.

Current yield is much simpler: annual coupon ÷ price. It ignores the gain or loss you take if you buy away from par and hold to maturity, and it ignores the time value of money. For a discount bond, current yield sits between the coupon rate and YTM. For a premium bond, the order reverses: coupon rate > current yield > YTM. At par, all three are equal.

Key formulas to remember

Bond price
PV = PMT ÷ (1+r) + PMT ÷ (1+r)² + … + (PMT + FV) ÷ (1+r)^N
r is the periodic yield (annual yield ÷ m). N is years × m. PMT is the coupon per period.
Yield to maturity
Find r such that price = Σ PMT ÷ (1+r)^t + FV ÷ (1+r)^N
It is the IRR of the bond's cash flows. Solve with a calculator, not by algebra.
Annualised (street convention) yield
Quoted yield = periodic rate × m
m = 2 for semiannual, 4 for quarterly, 12 for monthly. No compounding within the year.
Effective annual yield
EAY = (1 + quoted yield ÷ m)^m − 1
Use this to compare bonds with different payment frequencies.
Convert between frequencies
(1 + y₁ ÷ m₁)^m₁ = (1 + y₂ ÷ m₂)^m₂
Both sides equal 1 + EAY. Solve for the unknown yield.
Current yield
Current yield = annual coupon ÷ bond price
Use the annual coupon in currency terms. For a semiannual bond, add both coupons.
Yield ordering
Premium: coupon rate > current yield > YTM. Discount: coupon rate < current yield < YTM. Par: all equal.
A quick check that your answer is sensible.

How to solve Bond Yield Measures: Current Yield and YTM questions

Use this routine for any question on bond pricing, YTM, current yield or yield conversion.

  1. 1Identify the payment frequency m and the number of years. Set the periodic rate = annual yield ÷ m and N = years × m.
  2. 2Find the coupon per period = annual coupon ÷ m. Note the face value (FV), usually 100 or the stated par amount.
  3. 3Decide what is unknown: price (discount the cash flows), YTM (solve for the rate), or current yield (divide).
  4. 4On the calculator, clear the TVM memory, then enter N, I/Y (periodic), PMT, FV, and compute PV. Or enter PV (as a negative) and compute I/Y.
  5. 5If you solved for a periodic rate, multiply by m to get the quoted annual yield. Compound to get EAY only if asked.
  6. 6Check the ordering: price below par means YTM > current yield > coupon rate. Price above par means the reverse.
  7. 7Eliminate options that confuse periodic and annual rates or use the wrong m. Pick the remaining one that fits.

Quickest way: Order check plus calculator TVM

When to use it: Use this when options are spread out enough that direction and rough size can remove two choices, which is usual with three options.

  1. Compare price with par. This tells you the order of coupon rate, current yield and YTM without any calculation.
  2. Strike out options that break that order. For example, a YTM below the coupon rate on a discount bond is wrong.
  3. If you still need a number, enter N, I/Y, PMT, FV on the TI BA II Plus (2nd, FV clears TVM) and press CPT PV. Enter PV and CPT I/Y to get the periodic yield. On the HP 12C use n, i, PMT, FV, then PV.
  4. Remember to multiply the periodic rate by m for the quoted yield, or compound it for EAY.
  5. Current yield needs no TVM: divide annual coupon by price.

Common mistakes in Bond Yield Measures: Current Yield and YTM

  • Using the annual yield as the periodic rate in a semiannual bond.

    The question gives an annual yield, and it is easy to enter it straight into I/Y.

    Fix: Divide the annual yield by m and multiply the years by m before you enter anything. Both N and I/Y must be per period.

  • Calling the periodic rate times m an effective annual yield.

    Both are annual figures, so they look interchangeable.

    Fix: The street convention yield does not compound. Only (1 + periodic)^m − 1 is the effective annual yield, and it is always higher when m > 1 and the rate is positive.

  • Using only one coupon in current yield for a semiannual bond.

    You take the coupon from the last period rather than the year.

    Fix: Annualise the coupon first: coupon rate × face value. Then divide by the price.

  • Putting current yield on the wrong side of YTM.

    Current yield ignores the pull to par, and it is hard to remember which way that goes.

    Fix: For a discount bond you gain as price rises to par, so YTM is higher than current yield. For a premium bond you lose, so YTM is lower.

  • Forgetting the sign convention on the calculator.

    Entering PV and FV with the same sign makes the calculator return an error or nonsense.

    Fix: Enter price as a negative PV (cash out) with PMT and FV positive, or the reverse. They must have opposite signs.

  • Treating YTM as the return you will certainly earn.

    YTM is quoted as a single clean number.

    Fix: Remember its assumptions: hold to maturity, no default, and coupons reinvested at the YTM. If a question changes any of these, realised return can differ.

Worked examples

Example 1

A 2-year bond pays a 6% annual coupon semiannually and has a face value of 100. Its YTM is 8% on a semiannual bond basis. What is its current yield? A) 6.00% B) 6.23% C) 8.00%

Show the solution
  1. Periodic yield = 8% ÷ 2 = 4%. N = 2 × 2 = 4. PMT = 6 ÷ 2 = 3. FV = 100.
  2. Calculator: N = 4, I/Y = 4, PMT = 3, FV = 100, CPT PV. The result is −96.37, so the price is 96.37.
  3. Check by hand: the annuity factor is (1 − 1.04^−4) ÷ 0.04 = 3.6299, so 3 × 3.6299 = 10.89. The PV of 100 is 100 ÷ 1.16986 = 85.48. The sum is 96.37.
  4. Annual coupon = 3 × 2 = 6.
  5. Current yield = 6 ÷ 96.37 = 6.23%.
  6. Order check: this is a discount bond, so coupon rate (6%) < current yield (6.23%) < YTM (8%). The result fits.

Answer: B) 6.23%

Example 2

A bond has a YTM of 6.00% on a semiannual bond basis. What is the equivalent yield on a quarterly-pay bond basis? A) 5.96% B) 6.00% C) 6.09%

Show the solution
  1. Find the effective annual yield: (1 + 0.06 ÷ 2)^2 − 1 = 1.03² − 1 = 6.09%.
  2. Set the quarterly basis equal to it: (1 + y ÷ 4)^4 = 1.0609.
  3. Take the fourth root. √1.0609 = 1.03, and √1.03 = 1.014889.
  4. Quarterly periodic rate = 0.014889. Quoted yield = 4 × 0.014889 = 5.96%.
  5. Sense check: more frequent compounding needs a lower quoted rate for the same effective yield, so the answer must be below 6.00%. The 6.09% option is the effective annual yield, not the quarterly basis.

Answer: A) 5.96%

Exam tips

  • Wrong options often reflect common mistakes, such as forgetting to divide by m or reporting the effective annual yield instead of the quoted yield. Work out what each option could represent before you calculate, but do not assume any fixed pattern.
  • Use the premium/discount order (coupon, current yield, YTM) to remove two options quickly. This works with no calculator at all.
  • Always check whether the question says semiannual bond basis, annual-pay basis or effective annual. They are different numbers for the same bond.
  • Practise the TVM keystrokes until they are automatic: N, I/Y, PMT, FV, CPT PV, and the reverse for I/Y. Each question should take about 90 seconds.
  • If a question asks what YTM assumes, remember: held to maturity, all payments made as promised, and coupons reinvested at the YTM.

Practice questions from Yield and Yield Spread Measures for Fixed-Rate Bonds

Bond Yield Measures: Current Yield and YTM in other exams

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

Bond Yield Measures: Current Yield and YTM: frequently asked questions

What is the yield to maturity formula for CFA Level I?

There is no closed-form formula. You solve for r in: price = Σ PMT ÷ (1+r)^t + FV ÷ (1+r)^N. In practice you use the TVM keys on the BA II Plus or HP 12C, entering N, PV, PMT and FV and computing I/Y, then multiply by the number of periods per year.

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

Current yield is annual coupon ÷ price and measures only income. YTM is the IRR on all cash flows and includes the gain or loss from price moving to par at maturity as well as the time value of money. They are equal only when the bond trades at par.

What is the difference between semiannual bond basis yield and effective annual yield?

The semiannual bond basis yield is the periodic yield times 2, with no compounding. The effective annual yield is (1 + periodic yield)^2 − 1, which includes compounding. For the same bond, the effective annual yield is higher.

Why is YTM higher than current yield for a discount bond?

A discount bond is bought below par and pulls to par at maturity. YTM counts that price gain on top of the coupons. Current yield ignores it, so it is lower than YTM.